Office of the Secretariat 

Commodity Futures Trading Commission 

Three Lafayette Center 

I 155 21 51 Street NW 

Washington, DC 20581 

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

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•1 Introduction ~ )...-

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This comment represents the views of the International Swaps and Derivatives =---1 

Association (ISDA). ISDA, which represents participants in the privately negotiated 

derivatives industry, is the largest global financial trade association, by number of 

member firms. ISDA was chartered in I 985, and today has over 830 member institutions 

from 56 countries on six continents. These members include most of the world's major 

institutions that deal in privately negotiated derivatives, as well as many of the businesses, 

governmental entities and other end users that rely on over-the-counter derivatives to 

manage efficiently the financial market risks inherent in their core economic activities. 

ISDA documentation is the standard for OTC derivatives transactions globally. A current 

list ofiSDA's members, as well as other information about ISDA and its activities, is 

available on our website at www.isda.org. 

ISDA is grateful for the opportunity to respond to the Commission's Concept Release. To 

begin, it is helpful to bear in mind the purposes of the Commodity Exchange Act. As 

stated in Section 3 (7 U.S.C. 5), broadly speaking the purpose of the law is to promote an 

effective system of self regulation, deter and prevent abuse of markets and market 

participants, avoid systemic risk, and promote innovation and competition. All of these 

purposes are done so in light of the congressional finding that transactions subject to the 

Act are affected with a national public interest by providing a means to manage and 

assume price risk, discover prices and disseminating price information through trading in 

liquid, fair and financially secure trading facilities. 

It is likewise worthwhile to consider the broad exemptive authority which Congress gave 

the Commission in Section 4 of the Act (7 USC 6( c)), and the purposes for which the 

authority was granted. As noted by the Commission in its Concept Release, 4(c) was 

created "in order to promote responsible economic or financial innovation and fair 

competition ... "Additionally, as noted in the Release, this authority was granted with 

the intent that the Commission need not make a determination as to whether a particular 

transaction is otherwise subject to the Act. 1 

Taking these provisions of the Act together, and in light of the statutory scheme as a 

whole as amended by the Commodity Futures Modernization Act2

, it appears that 

Congress has placed a priority on creating a flexible regulatory structure capable of 

adjusting quickly to new developments in the markets. The Commission likewise has 

1 House Conference Report 102-978, 1992 U.S.C.C.A.N. 3214-3215 2 P.L. 106-580, December 29, 2000 

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used this authority with an eye towards promoting innovation while at the same time 

protecting market users; the phenomenal growth of US derivatives markets in the past 

eight years have demonstrated the wisdom of this approach. Continuing in this vein is 

likely to yield the most fruitful results when undertaking the present inquiry into event 

contracts. 

Response to Commission Questions 

The Public Interese 

The Commission asks what public interests are served by event contracts that are 

designed and traded for information aggregation purposes, and not for risk management 

or pricing purposes. The Commission also asks how these interests are consistent with 

the public interest goals, and what variables, etc. could be used to determine the social 

value of information to the general public. 

The existence of event contracts likewise indicates the existence of a market for the 

information generated and disseminated by such contracts. As the Commission certainly 

knows information has value in and of itself, and therefore it should be taken for granted 

that there is a public interest in the creation and dissemination of information regardless 

of the underlying nature or topic. Stated another way, a public interest exists in allowing 

information to be created so that a market value can be determined for such information. 

Given the academic and popular interest4 in the power of event markets to serve 

predictive purposes in recent years, there is now sufficient awareness of the nature and 

purposes of such markets to demonstrate both a demand for this type of information as 

well as an understanding of its limitations. Given their tendency to help clarify 

expectations about the likelihood of future events, it would seem that the national interest 

is served in promoting and not hindering the development of markets to assess the value 

of individual assessments of probability. 

Determining the social value of information is perhaps a task to which the Commission is 

not ideally suited. Obviously, determining "social value" is not one of the enumerated 

purposes of the Act. Furthermore it is unlikely that the Commission could develop a 

metric for determining "social value" that would be less controversial and more 

transparent than the demand for the information created by such markets. Given the 

apparent popularity of at least a handful of event markets, both for academic, research 

and other purposes, it appears such markets are meeting a demand for information which 

in and of itself demonstrates at least some "social value" of event contracts. 

3 The responses for each topical heading respond to the topics discussed in the Commission's Release. In 

order to avoid duplication, the answers respond broadly to the topics as revealed by the header. 4 The Commission cites some of the more relevant academic work in the Release; see also The Wisdom of 

Crowds: Why the Many Are Smarter Than the Few and How Collective Wisdom Shapes Business, 

Economies, Societies and Nations, James Surowiecki, Random House 2004. For a somewhat less rosy 

view (and for a historical precedent) see Extraordinary Popular Delusions and the Madness of Crowds, 

Charles MacKay, Harriman House Ltd., originally published 1841. 
Jurisdictional Determinations 

As the Commission notes in the Release, the Act grants broad authority over commodity 

options and futures. The history of regulation of commodity derivative contracts begins 

with a focus on agricultural commodities, and later, with the creation of the Commodity 

Futures Trading Commission, was extended to markets for "all other goods and 

articles ... and all services, rights and interests in which contracts for future delivery are 

presently or in the future dealt in." 7 U.S.C. la(4). This self-referentially broad 

formulation creates an exhaustive category of potential commodities under the Act, 5 

since if a futures contract is to come before the Commission for a jurisdictional 

determination the underlying commodity presumably will also be the subject of a contract 

"presently dealt in". 

The Commission's jurisdiction over options is also sweeping; Section 4c(b) grants the 

Commission the power to prohibit options on "any commodity" regulated under the Act.6 

However section 4c(b) grants broader latitude for market participants in that options 

contracts, if not explicitly prohibited by the Commission, are presumed valid contracts. 

However, at this juncture it is not necessary for the Commission to engage in an inquiry 

as to whether a particular event contract is a contract of sale of a commodity for future 

delivery or an option contract under the Act; indeed, such an inquiry is likely to be 

counterproductive to the goal of promoting "responsible economic or financial 

innovation." 

Congress gave the CFTC the ability to exempt transactions from the Act without first 

making a determination as to whether the transaction is subject to the Act. This reflects 

Congress' understanding that making jurisdictional determinations can have a broad 

impact across markets and products, and unintended consequences can result from taking 

an action, even an exemptive one, intended to ap~ly to only one type of transaction. The 

Commission has historically shared this concern. This prudent policy has allowed 

markets to operate without fear that seeking exemptive relief may unintentionally cast 

into doubt other transactions under the Act. 

In the Release the Commission discusses the definition and categorization of excluded 

commodities under the Act. This discussion aptly illustrates why great care must be 

taken in making jurisdictional determinations. Attempting to identify what interests are 

5 As the Commission is aware the determination of whether something is a commodity, or even a 

determination that a particular transaction is a futures contract, does not necessarily mean the Commission 

has jurisdiction. (See for example Act Section 2). 6 Of course, options on securities and foreign currency listed on a national securities exchange, and options 

covered under the "Treasury Amendment," as well as other transactions exempted or excluded under the 

Act, are treated separately. (See Commodity Exchange Act Sec. 2(c) et. seq.) 7 So attentive is the Commission to this danger that Rule 140.99, governing requests for exemptive or no 

action relief, implicitly acknowledges the Commission's care in making such determinations by not 

requiring petitioners to assert jurisdictional grounds. (Although the Rule does require a petitioner to state 

whether a proposed transaction is exempt or excluded from trading on a registered entity or exempt board 

of trade, this requirement can be seen as a factual assertion rather than a legal conclusion). 
"price based" or otherwise have "generally accepted and predictable financial, 

commercial or economic consequences," and differentiating between such contracts from 

those that "event contracts cover," the Commission runs the risk of instead complicating 

the question of what types of transactions are excluded from the Act. Though surely this 

is not the Commission's intent, attempting to draw jurisdictional conclusions with respect 

to event contracts is fraught with peril and is unnecessary at this juncture. Instead the 

Commission should follow its time tested and prudent practice, and avoid making 

jurisdictional determinations. The Commission should focus on a case-by-case basis 

whether specific event markets, seeking exemptive relief, should be granted such relief, 

or alternatively grant broad exemptive relief via 4( c) without making a jurisdictional 

determination. 

Legal Implementation 

The Commission's discussion of legal implementation asks whether it is appropriate to 

direct all or certain event contracts onto markets that are regulated differently from 

traditional DCMs. While creating a new category of market which is regulated 

differently from full DCM regulation is an attractive approach the Commission should be 

careful to allow event contract markets to choose this option, or to choose another option 

such as exemptive relief or even DCM registration. Allowing potential new markets a 

broad range of choices, rather than forcing any particular regulatory arrangement for the 

market, is likely to best serve the public's interest in promoting innovation and 

competition. 

The Commission further asks whether it is appropriate to use 4(c) to implement a 

regulatory scheme for event contracts and markets. As noted above this could be an 

appropriate route provided the Commission does not undertake jurisdictional 

determinations which could implicate other product types and markets. 

Market Participants 

The Commission asks questions with respect to participants in event markets that appear 

primarily focused on retail customers. Most of these concerns could be addressed as part 

of any review of a particular event market as part of a request for exemptive relief. 

Alternatively were the Commission to undertake creating a special category of 

registration for a particular type of event market, it would do well to draw upon its 

substantial experience in customer protection in other retail customer contexts. However 

it is premature to consider such arrangements absent a more detailed review and 

understanding of what and if any markets were likely to avail themselves of such a 

regime. 

Conclusion 

ISDA thanks the Commission for the opportunity to comment on this Release. As noted 

above, from the perspective of ISDA's members the most important consideration in the 

event contract discussion is ensuring that jurisdictional determinations are avoided which 
could adversely impact other markets and products. To that end ISDA recommends that 

if the Commission decides to undertake any further action in this area it rely upon the 

authority given it by Congress to grant exemptive relief without making any 

determination as to the jurisdictional characteristics of particular types of transactions. 

Likewise if the Commission decides to consider creating a new type of registered entity 

for purposes of facilitating the growth of event contract markets the Commission should 

be clear that such proposal in no way implicates, amends, repeals or affects existing 

exemptions and exclusions from the Act, nor creates any presumption that any agreement, 

contract or transaction is not an excluded commodity for purposes of the Act. 

Respectfully Submitted, 

Greg Zerzan 

Counsel and Head of Global Public Policy 

ISDA