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COMMENT Bell, Tom W. [tbell@chapman.edu] 

f.~llrlt1ay, July 06, 2008 11 :32 PM 

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.. ~ ~ . JBI~t Comment on Concept Release on the Appropriate Regulatory Treat~~t of Eyent 

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CFTC_JT _Reply. pdf 

(89 KB) 

Dear Office of the Secretariat, 

::z: 

9 

On behalf of myself and 19 other signatories, I would like to submit a joint comment on 

the CFTC's recent Concept Release on the Appropriate Regulatory Treatment of Event 

Contracts. I have attached our comment as a PDF (the preferred format) file, as well as 

in the body of this email, below. Thank you. 

Tom W. Bell 

* * * 

July 6, 2008 

Attention: Office of the Secretariat 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW. 

Washington, DC 20581 

Sent via e-mail to <secretary@cftc.gov>. 

Re: Joint Comment on Concept Release on the Appropriate Regulatory Treatment of Event 

Contracts 

G 

What regulatory treatment should the Commodities Futures Trading Commission ("CFTC") apply 

to event markets? We the undersigned, who represent a wide range of viewpoints, agree on 

three general observations. First and foremost, the CFTC should do no harm. Second, at a 

minimum, the CFTC should make more general the sort of "no action" status enjoyed by the 

Iowa Electronic Markets ("IEM"). Third, if the CFTC decides to regulate event markets 

more substantively, it should adopt clear and limited jurisdictional boundaries and allow 

affected parties to step outside of them. 

First, do no harm: Many sorts of event markets--including public ones, private ones, ones 

that offer only play-money trading, and ones that offer real-money trading--already thrive 

in the U.S. They have provided a rich array of benefits without evidently harming anyone. 

The CFTC could help event markets achieve still greater success by clarifying their 

legality. Instituting the wrong sort of regulations could suffocate event markets in 

their cradle, however. The CFTC should exercise a light hand, taking care to do no more 

than offer qualifying event markets the shelter of federal preemption and freeing them to 

continue operating under the extant legal regime. 

Second, open up the "no action" option: Thanks in part to the "no action" letters that 

the CFTC has issued to it, the IEM has for many years benefited the public by offering 

real-money event markets. No sound reason precludes the CFTC from giving similar 

treatment to other institutions that, like the IEM, offer event markets solely for 

academic and experimental purposes and without imposing trading commissions. 

1 
Although the CFTC's "no action" letters do not specify the exact criteria the IEM had to 

satisfy, they took favorable note of the IEM's account limits. Those account limits 

effectively prevent the IEM from supporting significant hedging functions. If the CFTC 

builds a similar requirement into any general "no action" guidelines, it should adopt 

limits considerably more generous than the meager $500/trader limit adopted decades ago by 

the IEM. Even a limit ten times that amount would still effectively preclude hedging. 

The CFTC should not limit "no action" status to markets run by tax-exempt organizations. 

The no-action letters that the CFTC issued to the IEM emphasized not the nature of the 

hosting institution, the University of Iowa, but rather the business model adopted by the 

IEM itself. Profitability could not have mattered, as tax-exempt organizations can and do 

earn profits (indeed, as their burgeoning endowments demonstrate, many universities earn 

immense profits). The CFTC apparently cared only that the IEM did not plan to profit from 

charging traders commissions. A tax-paying organization could satisfy that condition just 

as easily as a tax-exempt organization could. In either event, price discovery would 

flourish and consumers would win a safeguard against getting fleeced. 

Third, preserve regulatory exit options: If the CFTC decides to write substantive 

regulations for event markets, it should recognize and guard against the risk of 

overregulation. Even well-intentioned and well-informed regulators remain human and, 

thus, all too apt to make mistakes. They run an especially large risk of making mistakes 

when they first attempt to regulate new institutions, such as event markets. To make 

matters worse, regulators typically lack reliable signals to determine when they have gone 

too far. Industries wither away for many reasons, after all. 

The CFTC's approach to regulating event markets should accommodate these policy 

considerations by establishing clear jurisdictional boundaries and opening exit options. 

Thus, for instance, the CFTC might specify that it has no jurisdiction over event markets 

that offer trading only to members of a particular firm, over markets that offer only spot 

trading in negotiable conditional notes, or over markets that do not support significant 

hedging functions. Then, if the CFTC enacts unduly burdensome regulations, an event 

market could opt out of them by changing its business model. So long as markets publicly 

announce that they operate outside the CFTC's purview, allowing them that freedom of exit 

would harm nobody. To the contrary, it would help the CFTC gauge the suitability of its 

regulations and serve the public by protecting the continued viability of event markets. 

Signatures 

Please note that the signatories to this comment speak only for themselves. Any 

institutional affiliations listed below serve only for purposes of identification, not 

representation. Signatures follow in order of receipt via email sent to Tom W. Bell. 

Tom W. Bell 

Professor 

Chapman University School of Law 

Orange, CA 92866 

Email: tbell@chapman.edu 

Miriam A. Cherry 

Associate Professor 

University of the Pacific -McGeorge School of Law 3200 Fifth Avenue Sacramento, CA 95817 

Email: mcherry@pacific.edu 

Michael Abramowicz 

Professor of Law 

George Washington University 

2000 H St. NW 

Washington, DC 20052 

Email: abramowicz@law.gwu.edu 

Michael Strong 

2 
CEO 

FLOW 

1510 Falcon Ledge Drive 

Austin, TX 78746 

Email: michael@flowidealism.org 

Chris Hibbert 

Zocalo Open Source Prediction Markets 

195 Andre Ave. 

Mountain View, CA 94040 

Email: hibbert@mydruthers.com 

Robert Litan 

The Kauffman Foundation and The Brookings Institution c/o The Kauffman Foundation 

4801 Rockhill Rd. 

Kansas City, Mo. 64110 

Email: RLitan@kauffman.org 

Mark R. Ayres, Ph.D. 

5847 S. Orchard Creek Cir. 

Boulder, CO, 80301 

Email: mrayres@msn.com 

Peter C. McCluskey 

1571 El Camino Real W., #15 

Mountain View, CA 94040 

Email: pcm@rahul.net 

Mark Rose 

Director Product Management, HedgeStreet (former) 

5475 Tesoro Court 

San Jose, CA 95124 

Email: m1rose28@yahoo.com 

Jonathan Gewirtz 

Chicago Boyz Blog 

P.O. Box 450404 

Miami, FL 33245-0404 

Email: jonathan.gewirtz@gmail.com 

Dr. Michael Giberson 

Texas Tech University (as of Aug. 1, 2008) 

212 Lawton Street 

Falls Church, VA 22046 

Email: michael.giberson@gmail.com 

Robin Hanson 

Research Associate, Future of Humanity Institute at Oxford University Associate Professor 

of Economics, George Mason University MSN 1D3, Carow Hall Fairfax VA 22030-4444 

Email: rhanson@gmu.edu 

Glenn H. Reynolds 

Beauchamp Brogan Distinguished Professor of Law The University of Tennessee College of Law 

1505 W. Cumberland Ave. 

Knoxville, TN 37996-1801 

Email: Pundit@instapundit.com 

3 
Gil Milbauer 

Private Citizen 

6308 154th ST SE 

Snohomish, WA 98296 

Email: gil.milbauer@gmail.com 

Robert Arvanitis 

Sherwood Farms Lane 

Westport CT 06880 

Email: arvanro@optonline.net 

Charles G. Hallinan 

Professor of Law 

University of Dayton School of Law 

300 College Park 

Dayton, OH 45469-2332 

Email: Charles.Hallinan@notes.udayton.edu 

Jethro Majette 

Retired Stock and Commodities Broker 

204 R Park Ridge Circle, 

Winston Salem, NC 27104-3673 

Email: JMAJETTE1@triad.rr.com 

John Chalupa 

PO Box 82 

Princeton, MA 01541 

Email: fink-nottle@xemaps.com 

Daniel Gould 

1431 Ocean Ave #202 

Santa Monica, CA 90401 

Email: dlg@dangould.com 

William Wittmeyer 

President 

eXS Inc. 

1900 Alameda de las Pulgas 

Suite llO 

San Mateo, CA 94403 

Email: wbw@exsnetworks.com 

Prof. Tom W. Bell 

Chapman University School of Law 

tbell@chapman.edu 

http://ssrn.com/author=183716 

www.tomwbell.com 

4 
July 6, 2008 

Attention: Office of the Secretariat 

Commodity Futures Trading Commission 

Three Lafayette Centre· 

1155 21st Street, NW. 

Washington, DC 20581 

Sent via e-mail to <secretary@cftc.gov>. 

RECEIVED 

r- - T r ... . . \..~. 

zms 1Ut - 7 m IO= 1 2 

OFC. OF r "E SECRETAR IAT 

COMMENT 

T _· ... 

Re: Joint Comment on Concept Release on the Appropriate Regulatory 

Treatment of Event Contracts 

What regulatory treatment should the Commodities Futures Trading Commission 

("CFTC") apply to event markets? We the undersigned, who represent a wide range of 

viewpoints, agree on three general observations. First and foremost, the CFTC should do 

no harm. Second, at a minimum, the CFTC should make more general the sort of "no 

action" status enjoyed by the Iowa Electronic Markets ("IEM"). Third, if the CFTC 

decides to regulate event markets more substantively, it should adopt clear and limited 

jurisdictional boundaries and allow affected parties to step outside of them. 

First, do no harm: Many sorts of event markets-including public ones, private ones, 

ones that offer only play-money trading, and ones that offer real-money trading-already 

thrive in the U.S. They have provided a rich array of benefits without evidently harming 

anyone. The CFTC could help event markets achieve still greater success by clarifying 

their legality. Instituting the wrong sort of regulations could suffocate event markets in 

their cradle, however. The CFTC should exercise a light hand, taking care to do no more 

than offer qualifying event markets the shelter of federal preemption and freeing them to 

continue operating under the extant legal regime. 

Second, open up the "no action" option: Thanks in part to the "no action" letters that 

the CFTC has issued to it, the IEM has for many years benefited the public by offering 

real-money event markets. No sound reason precludes the CFTC from giving similar 

treatment to other institutions that, like the IEM, offer event markets solely for academic 

and experimental purposes and without imposing trading commissions. 

Although the CFTC's "no action" letters do not specify the exact criteria the IEM had to 

satisfy, they took favorable note of the !EM's account limits. Those account limits 

effectively prevent the IEM from supporting significant hedging functions. If the CFTC 

builds a similar requirement into any general "no action" guidelines, it should adopt 

limits considerably more generous than the meager $500/trader limit adopted decades ago 

by the IEM. Even a limit ten times that amount would still effectively preclude hedging. 

The CFTC should not limit "no action" status to markets run by tax-exempt 
organizations. The no-action letters that the CFTC issued to the IEM emphasized not the 

nature of the hosting institution, the University of Iowa, but rather the business model 

adopted by the IEM itself. Profitability could not have mattered, as tax-exempt 

organizations can and do earn profits (indeed, as their burgeoning endowments 

demonstrate, many universities earn immense profits). The CFTC apparently cared only 

that the IEM did not plan to profit from charging traders commissions. A tax-paying 

organization could satisfy that condition just as easily as a tax-exempt organization could. 

In either event, price discovery would flourish and consumers would win a safeguard 

against getting fleeced. 

Third, preserve regulatory exit options: If the CFTC decides to write substantive 

regulations for event markets, it should recognize and guard against the risk of 

overregulation. Even well-intentioned and well-informed regulators remain human and, 

thus, all too apt to make mistakes. They run an especially large risk of making mistakes 

when they first attempt to regulate new institutions, such as event markets. To make 

matters worse, regulators typically lack reliable signals to determine when they have 

gone too far. Industries wither away for many reasons, after all. 

The CFTC's approach to regulating event markets should accommodate these policy 

considerations by establishing clear jurisdictional boundaries and opening exit options. 

Thus, for instance, the CFTC might specify that it has no jurisdiction over event markets 

that offer trading only to members of a particular firm, over markets that offer only spot 

trading in negotiable conditional notes, or over markets that do not support significant 

hedging functions. Then, if the CFTC enacts unduly burdensome regulations, an event 

market could opt out of them by changing its business model. So long as markets 

publicly announce that they operate outside the CFTC's purview, allowing them that 

freedom of exit would harm nobody. To the contrary, it would help the CFTC gauge the 

suitability of its regulations and serve the public by protecting the continued viability of 

event markets. 

Signatures 

Please note that the signatories to this comment speak only for themselves. Any 

institutional affiliations listed below serve only for purposes of identification, not 

representation. Signatures follow in order of receipt via email sent to Tom W. Bell. 

Tom W. Bell 

Professor 

Chapman University School of Law 

Orange, CA 92866 

Email: tbell@chapman.edu 

Joint Comment on Concept Release 2/6 
Miriam A. Cherry 

Associate Professor 

University of the Pacific- McGeorge School of Law 

3200 Fifth Avenue 

Sacramento, CA 95817 

Email: mcherry@pacific.edu 

Michael Abramowicz 

Professor of Law 

George Washington University 

2000 H St. NW 

Washington, DC 20052 

Email: abramowicz@law.gwu.edu 

Michael Strong 

CEO 

FLOW 

1510 Falcon Ledge Drive 

Austin, TX 78746 

Email: michael@flowidealism.org 

Chris Hibbert 

Zocalo Open Source Prediction Markets 

195 Andre Ave. 

Mountain View, CA 94040 

Email: hibbert@mydruthers.com 

Robert Litan 

The Kauffman Foundation and The Brookings Institution 

c/o The Kauffman Foundation 

480 1 Rockhill Rd. 

Kansas City, Mo. 64110 

Email: RLitan@kauffman.org 

Mark R. Ayres, Ph.D. 

5847 S. Orchard Creek Cir. 

Boulder, CO, 80301 

Email: mrayres@msn.com 

Joint Comment on Concept Release 3/6 
Peter C. McCluskey 

1571 El Camino Real W., # 15 

Mountain View, CA 94040 

Email: pcm@rahul.net 

Mark Rose 

Director Product Management, HedgeStreet (former) 

5475 Tesoro Court 

San Jose, CA 95124 

Email: m 1 rose28@yahoo.com 

Jonathan Gewirtz 

Chicago Boyz Blog 

P.O. Box 450404 

Miami, FL 33245-0404 

Email: jonathan.gewirtz@gmail.com 

Dr. Michael Giberson 

Texas Tech University (as of Aug. 1, 2008) 

212 Lawton Street 

Falls Church, VA 22046 

Email: michael.giberson@gmail.com 

Robin Hanson 

Research Associate, Future of Humanity Institute at Oxford University 

Associate Professor of Economics, George Mason University 

MSN 1 D3, Carow Hall 

Fairfax VA 22030-4444 

Email: rhanson@gmu.edu 

Glenn H. Reynolds 

Beauchamp Brogan Distinguished Professor of Law 

The University of Tennessee 

College of Law 

1505 W. Cumberland Ave. 

Knoxville, TN 37996-1801 

Email: Pundit@instapundit.com 

Joint Comment on Concept Release 4/6 
Gil Milbauer 

Private Citizen 

6308 154th ST SE 

Snohomish, W A 98296 

Email: gil.milbauer@gmail.com 

Robert Arvanitis 

Sherwood Farms Lane 

Westport CT 06880 

Email: arvanro@optonline.net 

Charles G. Hallinan 

Professor of Law 

University of Dayton School of Law 

300 College Park 

Dayton, OH 45469-2332 

Email: Charles.Hallinan@notes. udayton.edu 

Jethro Majette 

Retired Stock and Commodities Broker 

204 R Park Ridge Circle, 

Winston Salem, NC 27104-3673 

Email: JMAJETTE 1 @triad.rr.com 

John Chalupa 

PO Box 82 

Princeton, MA 0 1541 

Email: fink-nottle@xemaps.com 

Daniel Gould 

1431 Ocean Ave #202 

Santa Monica, CA 90401 

Email: dlg@dangould.com 

Joint Comment on Concept Release 516 
William Wittmeyer 

President 

eXS Inc. 

1900 Alameda de las Pulgas 

Suite 110 

San Mateo, CA 94403 

Email: wbw@exsnetworks.com 

Joint Comment on Concept Release 6/6