Received CFTC 

Records section 1/r/'di~ 

CMEGroup 

A CME/Chlcago Board of '!hide Company 

VIA E-MAIL 

Mr. David Stawick 

Secretary 

- ~,,~ S.-,..n.-T''Rif'T OFC. Or l f'il::. Ct...f\[. /-.. r' 

July 7, 2008 

~. : 

Craig S. Donohue 

Chief Executive Officer 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21 51 Street, N.W. COMMENT 

Washington, D.C. 20581 

Re: Concept Release on the Appropriate Regulatory Treatment of Event Contracts 

73 F.R. 25669 (May 7. 2008) 

Dear Mr. Stawick: 

CME Group Inc. ("CME Group") appreciates the opportunity to comment on the Commodity 

Futures Trading Commission's ("Commission's") Concept Release on the Appropriate Regulatory 

Treatment of Event Contracts. 

CME Group was formed by the July 2007 merger of Chicago Mercantile Exchange Holdings Inc. 

and CBOT Holdings, Inc. CME Group is the parent of Chicago Mercantile Exchange Inc. ("CME") 

and Board of Trade of the City of Chicago, Inc. ("CBOT"). CME Group also owns Swapstream 

Operating Services Limited, an OTC trading facility, and owns an interest in FXMarketspace 

Limited, an FX trading platform that is authorized and regulated by the United Kingdom's 

Financial Services Authority. CME Group serves the global risk management needs of our 

customers and those who rely on the price discovery provided by the competitive markets 

maintained by CME Group. CME Group offers a comprehensive selection of benchmark 

products in most major asset classes, including futures and options based on interest rates, 

equity indexes, foreign exchange, agricultural commodities, energy, and alternative investment 

products such as weather and real estate. Additionally, CME Group offers order routing, 

execution and clearing services to other exchanges by means of our Globex® electronic trading 

platform and our clearing house. CME Group is traded on NASDAQ under the symbol "CME." 

This letter will address: (a) the difficulties in defining event contracts as distinct from other futures 

and options contracts, (b) the permissibility of trading event contracts that meet the Commodity 

Exchange Act ("CEA") definition of "excluded commodities" on designated contract markets 

("DCMs") and derivatives transaction execution facilities ("DTEFs")( together, "registered 

exchanges"), and (c) intermediation in event markets. 

I. There is no clear distinction between event contracts and other futures and options 

contracts 
Mr. David A. Stawik 

July 7, 2008 

Page 2 of6 

The Commission proposes to distinguish event contracts from other futures and options contracts 

by defining them as information aggregation vehicles that are linked to eventualities or measures 

that neither derive from, nor correlate with, market prices or broad economic or commercial 

measures. At the outset, it should be noted that there is no requirement in the CEA or 

Commission regulations that commodities underlying futures and options contracts must correlate 

with market prices. Indeed, U.S. DCMs currently list contracts that are based on standard 

quantity-based economic indicators rather than market prices, e.g., CME's Nonfarm Payroll 

futures. There is also not any requirement that events or measures underlying futures and 

options contracts must correlate with broad economic or commercial measures. 

In particular, the Commission has attempted to distinguish between event contracts and certain 

contracts that have previously traded, or are currently trading, on U.S. DCMs based on whether 

the economic consequences of the event or occurrence are generally-accepted and predictably 

correlate to measures of broad economic or commercial activity. However, the Commission's 

examples reveal the difficulties in drawing this line. For example, the Commission described the 

likelihood of the formation of a specific type of storm within an identifiable geographic region as 

an environmental event that may not predictably correlate to commodity market prices or 

measures of broad economic or commercial activity. At the same time, the Commission 

acknowledged that the CBOT's former catastrophe single event insurance option contracts, which 

paid out a fixed amount if insured property damage exceeded a certain amount for a specific 

region during a specified interval of time, while not strictly price-based, rested on generallyaccepted and predictable financial, commercial or economic consequences. Similarly, the 

Commission stated that quantifications of weather phenomena, such as the volatility of 

temperature levels, constitute an environmental measure that may not predictably correlate to 

commodity market prices or measures of broad economic or commercial activity, while 

acknowledging that already listed contracts that are based on temperature volatilities, e.g., CME's 

Degree Days Index futures, fall into the category of those contracts that rest on generallyaccepted and predictable financial, commercial or economic consequences. 

We do not believe that event contracts should be placed in a separate category and be subject to 

a different set of requirements or conditions prior to listing on a DCM or DTEF. For purposes of 

the following analysis we are using "event contract". to mean contracts based on narrow 

commercial measures and events, environmental measures and events, and general measures 

and events. 

II. Event contracts that involve "excluded commodities". as defined in Section 1a(13)(iv) of 

the CEA. should be permitted to trade on registered exchanges 

Sections 2(a)(1 )(A) and 4c(b) of the CEA together provide the Commission with exclusive 

jurisdiction, with certain exceptions, with respect to commodity futures and options contracts. In 

determining whether event contracts are within the Commission's jurisdiction, the relevant 

threshold inquiry is whether they involve "commodities". The CEA does not restrict the concept of 

a "commodity" to a material item or even a stream of payments. Section 1 a ( 4) of the CEA 

enumerates certain commodities and states that commodities include "all other goods and 

articles, [except onions], and all services, rights, and interests in which contracts for future 

delivery are presently or in the future dealt in." As the Commission noted in its Concept Release, 
Mr. David A. Stawik 

July 7, 2008 

Page 3 of6 

Section 1 a(13) of the CEA provides further guidance as to the definition of a commodity by 

identifying four separate categories of "excluded commodities". 1 Section 1a(13)(iv) describes one 

type of excluded commodity as an occurrence, extent of an occurrence, or contingency that is 

beyond the control of the parties and that is associated with a financial, commercial, or economic 

consequence. The interests underlying many of the event contracts described by the 

Commission would meet the definition of an excluded commodity contained in Section 1a(13)(iv). 

This definition does not require that such commodity interests must correlate to market prices or 

that their economic consequences must be broad-based. Rather, the occurrence or contingency 

must only be "associated with" a financial, commercial, or economic consequence. 

There are many types of geopolitical events that can be expected to have financial, commercial 

or economic consequences that may be more or less predictable, and that clearly fall within the 

definition of excluded commodities in Section 1a(13)(iv). These include, but are not limited to, 

governmental actions or decisions regarding tax rates, government spending, limitations on 

foreign investment, trade sanctions and embargoes and immigration policy; official declarations of 

war; and United Nations votes and resolutions. Event contracts based on the likelihood or the 

expected extent of such geopolitical events would provide for the hedging of legitimate business 

risks that cannot be effectively hedged with more traditional futures and options products. 

Examples of some of the potential hedging needs created by the risks of the financial, 

commercial or economic consequences of some of these types of events are described below: 

(a) Decisions regarding tax rates- If a government raises tax rates, many individuals and 

business entities would effectively lose income or profits. These potential risks could be 

hedged with event contracts related to government decisions regarding tax rates. 

(b) Government spending- Changes in the amount of government spending have clear 

financial, commercial and economic implications. The funding for such spending is likely 

to come from a combination of current taxes and government borrowing. Therefore, 

futures contracts that are based solely on interest rates, which reflect a cost related to the 

borrowing component of government spending, would not provide a sufficient hedging 

vehicle for those who have economic risks related to the amount of government 

spending. A contract based on changes in government spending levels could provide a 

useful hedge to address those risks. 

(c) Limitations on foreign investment- An emerging market could potentially impose new 

restrictions on a foreign investor's ability to repatriate its capital. If a U.S. firm had 

invested in such a market, it might be forced to sell its interest to a local firm at a discount 

in order to recover a portion of its investment. This potential economic loss could not be 

hedged solely with futures based on the emerging market's currency exchange rate, 

1 Section 2(d) of the CEA provides that the statute does not apply to a transaction in an excluded commodity 

if it is entered into only between eligible contract participants and if it is not executed or traded on a trading 

facility. This Section should not be read to imply that an excluded commodity cannot be executed on a 

registered exchange. There are a number of futures and options currently trading on DCMs that are based 

on excluded commodities. Furthermore, Section 5a(g)(1) of the CEA explicitly permits DTEFs to list 

contracts involving excluded commodities in addition to those commodities that meet the requirements for 

underlying commodities that may be traded on a DTEF as described in Section 5a(b)(2). 
Mr. David A. Stawik 

July 7, 2008 

Page 4 of6 

which could depend on many other factors such as commodity prices for the emerging 

market's main exports. An event contract could provide a more effective hedging vehicle 

with respect to the risk of limitations on foreign investment in the emerging market. 

(d) Trade sanctions and embargoes- A U.S. chemical company that needs petroleumbased feedstocks to run its processes could use existing futures to hedge petroleum 

prices. However, if the government of a petroleum-producing country restricts the flow of 

crude oil or limits exports of petroleum, the chemical company may not be able to get 

feedstocks for its processes at any price. Therefore, event contracts based on trade 

sanctions and embargoes could offer a more effective hedge than contracts based solely 

on petroleum prices. 

(e) Immigration policy- The U.S., Canada, the European Union, and the Gulf States all rely 

heavily on immigrant labor in large parts of their economies, including the construction 

trades, agriculture, food processing, and service sectors. The relative availability of 

immigrant labor is affected both by economic and political conditions in labor-exporting 

countries and by immigration policies such as quotas and enforcement regimes in laborimporting countries. The risks created by potential changes in immigration policy, which 

cannot be hedged with any other types of futures contracts, might be hedged with event 

contracts. 

(f) Official declarations of war- The costs and economic dislocations that follow from wars 

are self-evident and event contracts based on official declarations of war may provide an 

opportunity to hedge against some of those financial consequences. The declarations of 

war that should be permitted to form the basis of event contracts should be defined under 

internationally-recognized legal standards to include only official declarations of war by 

the governing authority in a recognized state against another recognized state. 

Event contracts based on the types of geopolitical events described above would meet legitimate 

hedging needs resulting from the anticipated financial, commercial or economic consequences of 

those events. Because the prices of such contracts would reflect market expectations regarding 

the probability of the underlying events, they would also provide valuable information that may 

help guide investment decisions.2 Therefore, geopolitical event contracts, or any other type of 

event contracts that are based on excluded commodities, i.e., those that are beyond the control of 

the parties and that are associated with a financial, commercial, or economic consequence, 

should be permitted to trade on registered exchanges.3 

2 As the Commission noted in its Concept Release, the legislative history of the CEA reveals that Congress 

recognized that commodity futures trading provides a valuable benefit to commercial interests in part 

through its provision of market information and products that facilitate the making of marketing, financing, 

and distribution decisions. S. Rep. No. 93-1131, at 12 (1974). 

3 Moreover, since the commodity interests underlying these contracts would meet the definition of excluded 

commodities under the CEA, there would be no need for the Commission to exercise its Section 4(c) 

exemptive authority with respect to such event contracts. In addition, event contracts based on excluded 

commodities should be permitted to trade on markets that elect to operate as exempt boards of trade under 

Section 5d of the CEA, in that they would be contracts involving commodities with no cash market. 
Mr. David A. Stawik 

July 7, 2008 

Page 5 of6 

Ill. Event contracts that are not based on "excluded commodities" should not be permitted to 

trade on registered exchanges 

The interests underlying certain contracts that the Commission has described as event contracts 

would not meet the definition of an excluded commodity contained in Section 1 a(13)(iv) of the 

CEA and, therefore, should not be permitted to trade on registered exchanges. Such contracts 

would include those based on an occurrence that is not beyond the control of the parties because 

the outcome can be controlled by one or several private individuals that might trade the contract. 

For example, a futures contract based on the occurrence or non-occurrence of a celebrity 

marriage would not involve an excluded commodity as defined in Section 1a(13)(iv) because the 

celebrities themselves could trade the contract and could control the outcome of the underlying 

event. Similarly, a contract based on a specific farmer's crop yield would likely not be an 

excluded commodity because the farmer would have some control (albeit not total control) over 

his own crop yield. Other events that would not be excluded commodities because they can be 

controlled by one or a small group of individuals are sporting events, terrorist attacks, and 

assassinations. Of particular relevance in this regard is Core Principle 3 in Section 5( d) of the 

CEA, which requires that DCMs shall only list contracts that are not readily susceptible to 

manipulation. The listing of an event contract for which an individual or a small ,number of 

individuals could make the event occur or not occur would be inconsistent with this Core Principle 

because such a contract would be susceptible to manipulation.4 

IV. FCMs should be permitted to intermediate event contracts on registered exchanges 

pursuant to the same requirements that apply to other contracts 

The Commission has asked whether there are any types of trader or intermediary conduct 

peculiar to event contracts that should be prohibited or monitored closely by regulators. 

Registered exchanges are required to comply with Core Principles that protect market 

participants from manipulation, fraud, and other abusive practices. Traders and futures 

commission merchants ("FCMs") that are members of a registered exchange are already subject 

to stringent customer protection requirements with respect to their trading and intermediation of 

futures and options contracts, and these requirements should also apply with respect to contracts 

based on events that meet the CEA's definition of excluded commodities. 

V. Conclusion 

As discussed above, CME Group believes that event contracts are within the Commission's 

jurisdiction to the extent that they are based on interests that meet the CEA's definition of 

excluded commodities, and such contracts should be permitted to trade on registered exchanges. 

4 However, this should not prohibit the trading of event contracts based on governmental action, even 

though a head of state or a small group of government officials may make, or influence, such action. For 

example, the CBOT has traded contracts based on interest rates for many years, and the fact that a few 

individuals at the Fed may be able to strongly influence interest rates has never raised a concern with 

respect to those contracts. 
Mr. David A. Stawik 

July 7, 2008 

Page 6 of 6 

Furthermore, FCMs should be permitted to intermediate such contracts, pursuant to existing 

customer protection requirements. CME Group also requests that the Commission confirm that 

by attempting to define a certain category of contracts as event contracts, and engaging in an 

examination of the appropriate regulatory treatment of such event contracts, the Commission 

does not intend to draw into question or modify the regulatory treatment of any of the types of 

contracts that are currently listed, or that have previously been listed, by any DCM. 

We would be happy to discuss any of these issues with Commission staff. Please feel free to 

contact me at (312) 930-8275 or Craig.Donohue@cmegroup.com; Richard Lamm, Managing 

Director, Regulatory Counsel, at (312) 930-2041 or Richard.Lamm@cmegroup.com; or Anne 

Polaski, Associate Director and Regulatory Counsel, at 312-338-2679 or 

Anne.Polaski@cmegroup.com. Thank you for your consideration. 

cc: Acting Chairman Walter Lukken 

Commissioner Bart Chilton 

Commissioner Michael Dunn 

Commissioner Jill E. Sommers 

Ananda Radhakrishnan 

Richard Shilts 

David Van Wagner 

Sincerely, 

Craig S. Donohue 

Chief Executive Officer 

CME Group Inc.