David Stawick 

Secretary 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1'155 21st Street, N.W. 

Washington, DC 20581 

September 3, 2008 

COMMENT 

Re: Commodity Futures Trading Commission Conce.pt Release on the Appropriate 

Regulatory Treatment of Event Contracts 

Dear Mr. Stawick: 

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Recently the Commodity Futures Trading Comniission ("CFTC") requested comment on 

the appropriate regulatory treatment of financial agreements offered by markets commonly 

referred to as event, prediction, or information markets (generically "event contracts").1 The 

staff of the Division of Trading and Markets ("Division") of the Securities and Exchange 

Commission ("SEC" or "Commission") would like to offer the following brief comments. 

The Division recognizes that event contracts raise difficult issues under the Commodity 

Exchange Act ("CEA"). As the Concept Release points out, many of these event contracts are 

neither dependent on, nor necessarily relate to, market prices or broad-based measures of 

economic or commercial activity, but instead are frequently based on eventualities and measures 

as varied as the world's population in a particular year, the results of a political election, or the 

outcome of particular entertainment events. The Division supports the CFTC's efforts to 

determine the appropriate regulatory treatment of contracts on such non-economic events as a 

means of fostering market innovation and fair competition and to promote efficiency in 

regulatory oversight. 

Event contracts that generate trading prices that predictably correlate with market prices 

or broad-based measures of economic or commercial activity raise more difficult issues. For 

instance, as the Commission has stated, the definition of security includes binary options (which 

are a type of event contract) whose pricing in the secondary market moves in relation to the 

value of an underlying security or securities.2 Hence, the correct regulatory treatment of event 

2 

See Concept Release on the Appropriate Regulatory Treatment of Event Contracts, 73 FR. 2569 

(May 1, 2008) ("Concept Release"). 

See Securities Exchange Act Release No. 55871, 72 FR 32372, 32375 (JWie 12, 2007). 

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Mr. David Stawick 

September 3, 2008 

Page2 of2 

contracts depends, in part, on whether the contract is based on a security or group or index of 

securities (or an interest therein or based on the value thereof). 3 

In addition, event contracts that relate to corporate events, such as mergers or earnings 

per share announcements, raise even more difficult issues and policy considerations.4 For 

instance, there is potential for this type of contract to create a potential for insider trading and an 

incentive for management to manipulate such accounting measures as earnings per share. 

Accordingly, the Division is concerned about the effects that trading such contracts may have on 

securities markets. 

Event contracts thus clearly contain elements of interest to both agencies. In keeping 

with our agencies' Memorandum ofUnderstanding,5 we look forward to working with you to 

resolve these difficult regulatory issues with an eye toward fostering market innovation and fair 

competition and promoting efficiency in regulatory oversight. 

We appreciate the opportunity to comment on the Concept Release. Should you require 

any further information, please do not hesitate to contact me. 

3 

4 

5 

Cf. Concept Release at note 2; see Section 2(a)(l)(C)(i) of the CEA (which excludes options on 

one or more securities, including any group or index of such securities, or any interest therein or 

based on the value thereof, from the CFFC's exclusive jurisdiction). 

We note that, in 1993, the Iowa Electronic Markets requested no-action relief from the CFI'C 

regarding an Earnings Market comprised of contracts based on the projected quarterly earnings of 

several corporate stocks. The staff of the CFTC referred the proposal to the SEC at that time, 

noting that "it appears that the Earnings Market contracts could be viewed as in the nature of 

options on securities, which may be excluded from the Commission's jurisdiction pursuant to 

Section 2(a)(1 )(B)(i) of the [CEA ], but which may be subject to the jurisdiction of the Securities 

and Exchange Commission." Letter from Andrea Corcoran, Director, Division of Trading and 

Markets, CFTC, to Brandon C. Becker, Director, Division of Market Regulation, SEC (Jt.m.e 18, 

1993) (with Letter from Andrea Corcoran, Director, Division of Trading and Markets, CFTC, to 

Professor Neumann, Professor of Economics, University oflowa attached) (available at: 

htto://www.cftc.gov/files/foialr~foialfoirf0503b004.pdt). 

See Memorandum of Understanding Regarding Coordination of Areas of Common Regulatory 

Interest (March 11, 2008).