Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / Notices 25669 

1See Michael Gorham, Event Markets Campaign 

for Respect, Futures Industry Magazine (Jan./Feb. 

2004); Justin Wolfers and Eric W. Zitzewitz, 

Prediction Markets, 18 J. Econ. Persp. 107 (Spring 

2004); Robert W. Hahn and Paul C. Tetlock, Using 

Information Markets to Improve Public Decision 

Making, AEI-Brookings Joint Center for Regulatory 

Studies Working Paper 04–18 (March 2005); Hal R. 

Varian, Can Markets Be Used to Help People Make 

Nonmarket Decisions?, The New York Times (May 

8, 2003). 

2The term event contract is not intended to 

encompass contracts that generate trading prices 

that predictably correlate with market prices or 

broad-based measures of economic or commercial 

activity, or contracts which substantially replicate 

other commodity derivatives contracts, such as 

binary options on exchange rates or the price of 

crude oil. The aforementioned contracts are 

unambiguously subject to CFTC regulation. 

3See, e.g., Retired claims list at the Foresight 

Exchange, available at http://www.ideosphere.com/ 

fx-bin/ListClaims. 

Comments may also be submitted by 

facsimile at (301)427–2521, provided 

the facsimile is confirmed by hard copy 

submitted by mail and postmarked no 

later than the closing date of the 

comment period. 

Comments may also be submitted by 

e-mail. The mailbox address for 

providing e-mail comments is 

NMFS.Pr1Comments@noaa.gov. Include 

in the subject line of the e-mail 

comment the following document 

identifier: File No. 731–1774. 

FOR FURTHER INFORMATION CONTACT: 

Jennifer Skidmore or Carrie Hubard, 

(301)713–2289. 

SUPPLEMENTARY INFORMATION: The 

subject amendment to Permit No. 540–

1811, issued on March 31, 2006, and 

most recently amended on June 16, 

2006, is requested under the authority of 

the Marine Mammal Protection Act of 

1972, as amended (MMPA; 16 U.S.C. 

1361 et seq.), the Regulations Governing 

the Taking and Importing of Marine 

Mammals (50 CFR part 216), the 

Endangered Species Act of 1973, as 

amended (ESA; 16 U.S.C. 1531 et seq.), 

and the Regulations Governing the 

Taking, Importing, and Exporting of 

Endangered and Threatened Species (50 

CFR 222–226). 

Permit No. 540–1811, issued to John 

Calambokidis, currently authorizes 

aerial and vessel surveys, photoidentification, behavioral observations, 

tagging (using suction-cup attached 

tags), biopsy, video and acoustic 

recording, and incidental harassment of 

all species of odontocetes and baleen 

whales in the North Pacific Ocean. The 

purpose of the modification is to 

enhance the examination of movements 

(for stock structure assessment) and 

habitat use of: blue (Balaenoptera 

musculus), fin (B. physalus), sei (B.a 

borealis), gray (Eschrichtius robustus), 

sperm (Physeter macrocephalus), 

Bryde’s (B. edeni), humpback 

(Megaptera novaeangliae) and minke (B. 

acutorostrata) whales, Mesoplodon 

beaked whales (Mesoplodon spp), 

Cuvier’s (Ziphius cavirostris) and 

Baird’s (Berardius bairdii) beaked 

whales, and bottlenose (Tursiops 

truncatus) and Risso’s (Grampus 

griseus) dolphins via dart tagging. For 

each species, an addition of 20 takes by 

dart tagging are requested, with the 

exception of sei whales, where only 5 

takes are requested. Additionally, an 

increase in the number of biopsy and 

suction-cup tagging takes (between 10 - 

40 takes) for several cetacean species 

(fin, sperm, and short-finned pilot 

whales (Globicephala macrorhynchus) 

and Baird’s, Cuvier’s, and Mesoplodon 

beaked whales) are being requested in 

order to better increase understanding of 

stock structure and behavior. Takes by 

Level B harassment (e.g., incidental 

harassment of non-target animals) are 

already authorized under Permit No. 

540–1811 and no additional Level B 

harassment takes are requested. Dart 

tagging will occur concurrently with 

already permitted activities (i.e., vessel 

surveys, photo-identification, suctioncup tagging etc), primarily in 

Californian waters, though some species 

may be tagged opportunistically 

elsewhere where activities are 

authorized (i.e., U.S. and international 

waters of the Pacific including Alaska, 

Washington, Oregon, and other U.S. 

territories). The amended permit, if 

issued, would be valid until the permit 

expires on April 14, 2011. 

Concurrent with the publication of 

this notice in the Federal Register, 

NMFS is forwarding copies of this 

application to the Marine Mammal 

Commission and its Committee of 

Scientific Advisors. 

Documents may be reviewed in the 

following locations: 

Permits, Conservation and Education 

Division, Office of Protected Resources, 

NMFS, 1315 East-West Highway, Room 

13705, Silver Spring, MD 20910; phone 

(301)713–2289; fax (301)427–2521; 

Northwest Region, NMFS, 7600 Sand 

Point Way NE, BIN C15700, Bldg. 1, 

Seattle, WA 98115–0700; phone 

(206)526–6150; fax (206)526–6426; 

Alaska Region, NMFS, P.O. Box 

21668, Juneau, AK 99802–1668; phone 

(907)586–7221; fax (907)586–7249; and 

Southwest Region, NMFS, 501 West 

Ocean Blvd., Suite 4200, Long Beach, 

CA 90802–4213; phone (562)980–4001; 

fax (562)980–4018. 

Dated: May 1, 2008. 

P. Michael Payne, 

Chief, Permits, Conservation and Education 

Division, Office of Protected Resources, 

National Marine Fisheries Service. 

[FR Doc. E8–10104 Filed 5–6–08; 8:45 am] 

BILLING CODE 3510–22–S 

COMMODITY FUTURES TRADING 

COMMISSION 

Concept Release on the Appropriate 

Regulatory Treatment of Event 

Contracts 

AGENCY: Commodity Futures Trading 

Commission. 

ACTION: Request for Public Comment. 

SUMMARY: The Commodity Futures 

Trading Commission (Commission or 

CFTC) is soliciting comment on the 

appropriate regulatory treatment of 

financial agreements offered by markets 

commonly referred to as event, 

prediction, or information markets.1 For 

ease of reference and to avoid 

classification issues, these financial 

agreements are referred to herein as 

event contracts. In general, event 

contracts are neither dependent on, nor 

do they necessarily relate to, market 

prices or broad-based measures of 

economic or commercial activity.2

Rather, event contracts may be based on 

eventualities and measures as varied as 

the world’s population in the year 2050, 

the results of political elections, or the 

outcome of particular entertainment 

events.3 The Commission’s staff has 

received a substantial number of 

requests for guidance on the propriety of 

trading various event contracts under 

the regulatory rubric of the Commodity 

Exchange Act (CEA or Act). Given the 

substantive and practical concerns that 

may arise from applying federal 

regulation to event contracts and 

markets, the Commission believes that it 

is appropriate to solicit and consider the 

public’s comments in advance of issuing 

any definitive guidance. 

DATES: Comments must be received by 

July 7, 2008. 

ADDRESSES: Comments should be sent to 

the Commodity Futures Trading 

Commission, Three Lafayette Centre, 

1155 21st Street, NW., Washington, DC 

20581, Attention: Office of the 

Secretariat. Comments may be sent by 

facsimile to 202.418.5521, or by e-mail 

to secretary@cftc.gov. Reference should 

be made to the ‘‘Concept Release on the 

Appropriate Regulatory Treatment of 

Event Contracts.’’ Comments may also 

be submitted through the Federal 

eRulemaking Portal at http:// 

www.regulations.gov. 

FOR FURTHER INFORMATION CONTACT: 

Bruce Fekrat, Special Counsel, Office of 

the Director (telephone 202.418.5578, email bfekrat@cftc.gov), Division of 


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25670 Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / Notices 

4The IEM is run by the University of Iowa 

Departments of Accounting and Economics and the 

University’s College of Business Administration. 

5CFTC Staff Letter No. 93–66 [1992–1994 

Transfer Binder] Comm. Fut. L. Rep. (CCH) ¶ 25,785 

(June 18, 1993). This no-action letter superseded the 

operative terms of a more limited letter issued to 

the IEM in 1992. The 1993 letter’s relief extends to 

IEM contracts based on political elections, 

economic indicators, and certain currency exchange 

rates. The letter requires that the IEM limit access 

to any one submarket to between 1,000 and 2,000 

traders. The letter also sets the maximum amount 

that any single participant can risk in any one 

submarket at five hundred dollars. The letter makes 

clear that relief is premised on, among other factors, 

the IEM’s representations concerning the market’s 

specific manner of operation and academic 

purpose, and the assurance that the IEM will not 

receive any profit or other form of compensation 

from its activities. 

6See, e.g., Michael Abramowicz, Information 

Markets, Administrative Decision Making, and 

Predictive Cost-Benefit Analysis, 71 U. Chi. L. Rev. 

933, 950 (2004). 

7See Cass R. Sunstein, Group Judgments: 

Statistical Means, Deliberation, and Information 

Markets, 80 N.Y.U. L. Rev. 962, 1029–31 (June 

2005). 

8See, e.g., Intrade Prediction Markets, Current 

Events Contracts at http://www.intrade.com/jsp/ 

intrade/contractSearch/. 

Market Oversight, Commodity Futures 

Trading Commission, Three Lafayette 

Centre, 1155 21st Street, NW., 

Washington, DC 20581. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

A. Purpose of the Release 

Since 2005, the Commission’s staff 

has received a substantial number of 

requests for guidance on the propriety of 

offering and trading financial 

agreements that may primarily function 

as information aggregation vehicles. 

These event contracts generally take the 

form of financial agreements linked to 

eventualities or measures that neither 

derive from, nor correlate with, market 

prices or broad economic or commercial 

measures. Event contracts have been 

based on a wide variety of interests 

including the results of presidential 

elections, the accomplishment of certain 

scientific advances, world population 

levels, the adoption of particular pieces 

of legislation, the outcome of corporate 

product sales, the declaration of war 

and the length of celebrity marriages. In 

response to the various requests for 

guidance, and to promote regulatory 

certainty, the Commission has 

commenced a comprehensive review of 

the Act’s applicability to event contracts 

and markets. To further its review, the 

Commission is issuing this release to 

solicit the expertise of interested 

persons, including CFTC-registered 

markets, exempt markets, over-thecounter derivatives dealers, capital 

market participants, legal practitioners, 

state and federal regulatory authorities, 

academicians and research institutions 

with respect to the practical and 

regulatory issues relevant to regulating 

event contracts and markets. 

Broadly speaking, the Commission 

must determine: 

1. Whether event contracts are within 

the Commission’s jurisdiction and if so, 

why (or why not)? 

2. If event contracts are within the 

Commission’s jurisdiction, should there 

be exemptions or exclusions applied to 

them and if so, why (or why not)? 

3. How should the Commission 

address the potential gaming aspects of 

some event contracts and the possible 

pre-emption of state gaming laws? 

The Commission urges interested 

persons to provide detailed and 

comprehensive comments that will 

assist the Commission in conducting its 

review and analysis of the 

Commission’s regulatory purview over 

event contracts, the interests that may 

appropriately underlie Commissionregulated transactions, and the 

appropriate regulatory treatment of 

markets that may offer event contracts. 

B. CFTC Experience With Event 

Contracts 

The Iowa Electronic Markets (IEM), an 

electronic trading facility that functions 

as an experimental and academic 

program, is one of the better known and 

oft discussed real-money event markets 

currently in operation.4 The IEM 

operates in part pursuant to a 1993 noaction letter issued by Commission staff 

which, without asserting jurisdiction or 

describing the potential parameters of 

the Commission’s regulatory purview 

over the market, allows the IEM to list 

various event contracts subject to 

certain conditions and limitations for 

covered contracts.5

The IEM continues to be most 

recognized for its presidential election 

contracts. The IEM offers a vote share 

contract and a winner-take-all contract 

for the 2008 U.S. presidential election 

cycle. Its vote share contract is 

ultimately associated with the 

candidates that will be nominated by 

each party. Each vote share contract has 

a maximum value of $1 and a contract 

payout that is directly based on the 

percentage of the popular vote received 

by each of the two major party 

candidates. For instance, a contract for 

a candidate who receives 40% of the 

popular votes cast for both candidates 

will be worth $.40 at settlement. 

In contrast, the IEM’s 2008 

presidential election winner-take-all 

contract will have a value of either $1 

or $0 at settlement. The IEM’s winnertake-all-contract is also associated with 

a specific candidate, but instead of 

having a payout that is tied to a 

particular percentage of the popular 

vote received by each candidate, the 

contract will distribute a fixed payout of 

$1 to its holder if and only if the 

candidate referenced by the contract 

receives a greater percentage of the 

popular vote cast. Although the IEM’s 

presidential election contracts are 

imperfect vehicles for the discovery of 

information, there is some consensus on 

the question of whether the IEM’s 

contracts can function capably as 

predictive tools.6 Indeed, trading data 

generated by some IEM presidential 

election contracts arguably have 

produced better predictive indicators 

than data obtained from professional 

polling organizations.7

II. Commodity Options and Futures and 

the Attributes of Event Contracts 

The Commission, with some 

exceptions, has exclusive jurisdiction 

over two relevant types of derivative 

instruments—commodity options and 

commodity futures contracts. Section 

4c(b) of the Act gives the Commission 

plenary jurisdiction over commodity 

options, and provides that ‘‘[n]o person 

shall * * * enter into * * * any 

transaction involving any commodity 

regulated under this Act which is of the 

character of, or is commonly known to 

the trade as, an option * * * contrary 

to any rule, regulation or order of the 

Commission[.]’’ Section 2(a)(1)(A) of the 

Act provides that the Commission shall 

have exclusive jurisdiction with respect 

to accounts, agreements, and 

transactions (including options) 

involving contracts of sale of a 

commodity for future delivery. Event 

contracts, depending on their 

underlying interests, can be designed to 

exhibit the attributes of either options or 

futures contracts. 

A significant number of event 

contracts are structured as all-or-nothing 

binary transactions commonly described 

as binary options.8 Binary event 

contracts typically pay out a fixed 

amount when an outcome either occurs 

or does not occur. The trading of such 

contracts can facilitate the discovery of 

information by assigning probabilities, 

through market-derived prices, to 

discrete eventualities. For example, a 

binary contract based on whether a 

particular person will run for the 

presidency in 2012, can pay a fixed 

$100 to its buyer if and only if that 

individual runs for the presidency in 

2012. If the contract’s traders believe 

that the likelihood of the individual’s 

candidacy in 2012 is around 17 percent, 

the price of the contract will be around 


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Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / Notices 25671 

9 7 U.S.C. 1a(4). Section 1a(4) of the Act 

enumerates the following commodities: wheat, 

cotton, rice, corn, oats, barley, rye, flaxseed, grain 

sorghums, mill feeds, butter, eggs, Solanum 

tuberosum (Irish potatoes), wool, wool tops, fats 

and oils (including lard, tallow, cottonseed oil, 

peanut oil, soybean oil, and all other fats and oils), 

cottonseed meal, cottonseed, peanuts, soybeans, 

soybean meal, livestock, livestock products, and 

frozen concentrated orange juice. 10See United States v. Valencia, No. H–03–024, 

2003 WL 23174749 at *8 (S.D. Tex Aug. 25, 2003) 

(noting that the determination of whether West 

Coast natural gas is ‘‘a commodity in which 

contracts for future delivery are presently or in the 

future dealt in,’’ is a fact question, and that ‘‘there 

is no evidence that West Coast gas could not in the 

future be traded on a futures exchange.’’). 

11 7 U.S.C. 1a(13). Section 1a(13) of the Act 

provides that: 

The term ‘‘excluded commodity’’ means—

(i) an interest rate, exchange rate, currency, 

security, security index, credit risk or measure, debt 

or equity instrument, index or measure of inflation, 

or other macroeconomic index or measure; 

(ii) any other rate, differential, index, or measure 

of economic or commercial risk, return, or value 

that is—

(I) not based in substantial part on the value of 

a narrow group of commodities not described in 

clause (i); or 

(II) based solely on one or more commodities that 

have no cash market; 

(iii) any economic or commercial index based on 

prices, rates, values, or levels that are not within the 

control of any party to the relevant contract, 

agreement, or transaction; or 

(iv) an occurrence, extent of an occurrence, or 

contingency (other than a change in the price, rate, 

value, or level of a commodity not described in 

clause (i)) that is—

(I) beyond the control of the parties to the 

relevant contract, agreement, or transaction; and 

(II) associated with a financial, commercial, or 

economic consequence. 

12For example, the Chicago Board of Trade’s 

catastrophe single event insurance option contracts 

(which are no longer listed) paid out a fixed amount 

if and only if insured property damage exceeded 

$10 billion for a specific region during a specified 

interval of time. 

13See, e.g., Hearing on Futures Trading Before the 

House Committee on Agriculture, 66th Cong., 3rd 

Sess. 1043 (1921); Hearings on H.R. 5676 Before the 

Senate Committee on Agriculture and Forestry, 67th 

Cong., 1st Sess. 452 (1921); Hearings on Futures 

Trading Before the House Committee on 

Agriculture, 67th Cong. 1st Sess. 7–9 (1921); 61 

Cong. Rec. 4761 (1921) (remarks of Senator Capper, 

the sponsor of the Senate bill which became the 

Futures Trading Act of 1921 (later restyled as the 

Grain Futures Act of 1922 when found to be 

unconstitutional for its use of taxation to penalize 

off-exchange futures trading)). 

$17, and will approximate the market’s 

consensus expectation of the 

individual’s candidacy. 

In addition to binary event 

transactions, the term event contract has 

also been used to identify transactions, 

based on interests other than market 

prices, which resemble futures 

contracts. For instance, these types of 

event contracts can price consensus 

estimates of moving values, such as the 

number of hours the average U.S. 

resident spends in traffic or the share of 

votes that a particular candidate for 

political office may receive. Unlike 

binary transactions, and similar to any 

commodity futures contract, this type of 

contract creates continuous and ongoing 

obligations that are linked to moving 

measures or levels, as opposed to being 

dependent on the outcome of a single 

discrete occurrence. 

III. The Commission’s Regulatory 

Purview 

As discussed above, with some 

limited exceptions, the regulatory 

purview of the Act extends to and 

includes transactions that are either 

structured as options or futures when 

such transactions involve interests that 

constitute commodities under the Act. 

Section 1a(4) of the Act defines 

commodity in two distinct ways. First, 

Section 1a(4) specifically enumerates 

certain articles or goods as 

commodities.9 Second, Section 1a(4) 

defines the term commodity as 

including those articles or goods, and 

services, rights or interests, ‘‘in which 

contracts for future delivery are 

presently or in the future dealt in.’’

Therefore, an underlying interest that is 

not enumerated in Section 1a(4) may be 

a statutory commodity under the Act if 

it reasonably can underlie a futures 

contract on a forward looking basis.10

In addition to Section 1a(4), Section 

1a(13) of the Act identifies certain 

interests as excluded commodities and 

thereby gives further shape to the 

statutory definition of commodity.11

The Section 1a(13) definition of 

excluded commodity is composed of 

four subsections. The third subsection 

defines the term to include any 

economic or commercial index that is 

based on prices, rates, values, or levels 

not within the control of any party to 

the relevant contract. The fourth 

subsection of Section 1a(13) provides 

that an excluded commodity includes 

an occurrence, extent of an occurrence, 

or contingency associated with a 

financial or economic consequence that 

is not within the control of the parties 

to the relevant transaction. 

For the purpose of discussion and 

analysis, the types of event contracts 

that Commission staff has reviewed can 

be categorized, albeit imperfectly, as 

contracts that are based on narrow 

commercial measures and events, 

contracts based on certain 

environmental measures and events, 

and contracts based upon general 

measures and events. Narrow 

commercial measures quantify and 

reflect the rate, value, or level of 

particularized commercial activity, such 

as a specific farmer’s crop yield. Narrow 

commercial events, on the other hand, 

are events that might, in and of 

themselves, have commercial 

implications, such as changes in 

corporate officers or corporate asset 

purchases. 

Environmental measures can be 

characterized as quantifications of 

weather phenomena, such as the 

volatility of precipitation or temperature 

levels, that do not predictably correlate 

to commodity market prices or other 

measures of broad economic or 

commercial activity. By comparison, 

environmental events can include the 

formation of a specific type of storm, 

within an identifiable geographic 

region, the likelihood of which will not 

predictably correlate to commodity 

market prices or measures of broad 

economic or commercial activity. 

General measures can be described as 

measures that are not commercial or 

environmental measures. As such, 

general measures do not quantify the 

rate, value, or level of any commercial 

or environmental activity and can, for 

example, include the number of hours 

that U.S. residents spend in traffic 

annually or the vote-share of a 

particular presidential candidate. 

Similarly, general events, such as 

whether a Constitutional amendment 

will be adopted or whether two 

celebrities will decide to marry, can be 

described as events that do not reflect 

the occurrence of any commercial or 

environmental event. The category of 

general measures and events can be 

further divided into a multitude of 

subcategories, such as political or 

entertainment measures or events. 

Since 1992, Commission-regulated 

exchanges have listed for trading a 

variety of commodity futures and 

options contracts with payout terms 

based on interests other than pricebased interests. These contracts involve 

interests as diverse as regional insured 

property losses, the count of 

bankruptcies, temperature volatilities, 

corporate mergers, and corporate credit 

events.12 While not strictly price-based, 

the interests underlying these contracts 

have been viewed by Commission staff 

as having generally-accepted and 

predictable financial, commercial or 

economic consequences. In other words, 

unlike the interests that event contracts 

cover, these underlying interests have 

been viewed as measures and 

occurrences that reasonably could be 

expected to correlate to market prices or 

other broad-based commercial or 

economic measures or activities. 

IV. Further Statutory Background 

Federal regulations were initially 

applied to commodity derivatives 

trading in 1921.13 At that time, Congress 


sroberts on PROD1PC70 with NOTICES
25672 Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / Notices 

14See S. Rep. No. 871 (August 23, 1922). The 

Congressional record is replete with discussion of 

the commercial importance of commodity futures 

trading. The record suggests that commercial 

interests must be able to look to properly 

functioning commodity futures markets for market 

information and products that facilitate the making 

of marketing, financing, and distribution decisions. 

S. Rep. No. 93–1131, at 12 (1974). The 

Congressional record also indicates that an initial 

purpose behind regulating commodity futures 

trading was to secure fair and orderly markets for 

producers and other commercial participants who 

used the markets for price basing and hedging. 

Hearings on S. 2485, S. 2578, S. 2837 and H.R. 1311 

before the Senate Committee on Agriculture and 

Forestry, 93d Cong., 2d Sess. at 234 (1974); see also 

80 Cong. Rec. 10739 (April 11, 1974). 

15E.g., 61 Cong. Rec. 4761–4763 (1921) (remarks 

of Senator Capper); 61 Cong. Rec. 1379 (1921) 

(remarks of Rep. Bland); 61 Cong. Rec. 1313–1314 

(remarks of Rep. Tincher, the sponsor of the House 

bill which became the 1921 Act); 61 Cong. Rec. 

1376 (1921) (remarks of Rep. Gensman). 

16Hedging occurs when positions acquired are 

economically appropriate to the reduction of risks 

in the conduct and management of a commercial 

enterprise. See, e.g., 17 CFR 1.3(z) (definition of 

bona fide hedging). Price basing, a function of price 

discovery and dissemination, can occur when 

commercial entities enter into transactions in a 

particular commodity based upon commodity 

futures prices for that or a related commodity, 

oftentimes at a differential. 

17Appendix E, section 108, Pub. L. 106–554, 114 

Stat. 2763. 

18The hedging and price basing purposes of 

commodity futures trading are emphasized in other 

provisions of the Act as well. See, e.g., 7 U.S.C. 6a, 

6b, and 6c. As a matter of background, the provision 

in the Grain Futures Act that was the forerunner of 

current CEA Section 3 provided that: 

Transactions in grain involving the sale thereof 

for future delivery as commonly conducted on 

boards of trade and known as ‘‘futures’’ are affected 

with a national public interest; that such 

transactions are carried on in large volume by the 

public generally and by persons engaged in the 

business of buying and selling grain and the 

products and by-products thereof in interstate 

commerce; that the prices involved in such 

transactions are generally quoted and disseminated 

throughout the United States and in foreign 

countries as a basis for determining the prices to the 

producer and the consumer of grain and the 

products and by-products thereof and to facilitate 

the movements thereof in interstate commerce; that 

such transactions are utilized by shippers, dealers, 

millers, and others engaged in handling grain and 

the products and by-products thereof in interstate 

commerce as a means of hedging themselves against 

possible loss through fluctuations in price; that the 

transactions and prices of grain on such boards of 

trade are susceptible to speculation, manipulation, 

or control, which are detrimental to the producer 

or the consumer and the persons handling grain and 

products and by-products thereof in interstate 

commerce, and that such fluctuations in prices are 

an obstruction to and a burden upon interstate 

commerce in grain and the products and byproducts thereof and render regulation imperative 

for the protection of such commerce and the 

national public interest therein. 

Grain Futures Act, ch. 369, 42 Stat. 998 (Sept. 21, 

1922). In 1936, Congress restyled the Grain Futures 

Act as the Commodity Exchange Act and amended 

this provision to substitute the word ‘‘commodity’’

for ‘‘grain.’’ Pub. L. 74–675, section 2, 49 Stat. 1491 

(June 15, 1936). 

19 7 U.S.C. 7(g), as amended by the Commodity 

Futures Trading Commission Act of 1974, Pub. L. 

93–463, 88 Stat. 1389 (1974). In 1992, Section 5(g) 

was redesignated Section 5(7) of the Act. See 

Futures Trading Practices Act of 1992, Pub. L. 102–

546, 106 Stat. 3590 (1992). The CFMA repealed all 

of former Section 5 of the Act, including Section 

5(g) (redesignated as Section 5(7)), and replaced it 

with current Section 5. Section 5 was radically 

restructured by the CFMA to provide for 

designation criteria and core principles with which 

a DCM must comply. Appendix E of Pub. L. 106–

554, 114 Stat. 2763 (2000). 

20The House Committee on Agriculture stressed 

that contracts that could be expected to be used 

almost entirely for speculation would be against the 

public interest. H.R. Rep. No. 975, 93 Cong., 2d 

Sess. 29 (1974). 

21See H.R. Rep. No. 1383, 93d Cong., 2d Sess. 36 

(1974). 

22House Report No. 106–711(III) September 6, 

2000. 23House Conference Report 102–978, 1992 

U.S.C.C.A.N. 3179, 3213. 24With respect to the exercise of this discretion, 

the House-Senate Conference Committee 

responsible for the review of Section 4(c) stated 

that: 

The Conferees do not intend that the exercise of 

exemptive authority by the Commission would 

require any determination beforehand that the 

agreement, instrument, or transaction for which an 

exemption is sought is subject to the Act. Rather, 

this provision provides flexibility for the 

Commission to provide legal certainty to novel 

instruments where the determination as to 

jurisdiction is not straightforward. Rather than 

making a finding as to whether a product is or is 

not a futures contract, the Commission in 

appropriate cases may proceed directly to issuing 

an exemption. 

Conf. Report at 3214–3215. Although Section 4(c) 

only speaks to futures contracts, Section 4c(b) of the 

Act, the Commission’s plenary authority to regulate 

transactions that involve commodity options, 

provides the Commission with comparable 

exemptive authority for options. 

acknowledged that commodity futures 

markets could benefit commerce by 

facilitating the hedging of commercial 

risks and the discovery of reliable 

commodity prices.14 The Grain Futures 

Act of 1922, the forerunner to the CEA, 

consequently was enacted to promote 

the financial vitality of futures trading 

by limiting price manipulations and 

other disturbances that were prevalent 

at the time and widely perceived to 

result from excessive speculation.15

In identifying the national public 

interests that render federal regulation 

necessary, the Act focuses on the 

commercial benefits that wellfunctioning derivatives markets can 

provide by broadly expressing their 

critical functions. Customarily, hedging 

and price basing have been identified as 

two critical functions of the commodity 

derivatives markets.16 For instance, 

Section 3 of the Act, as amended by the 

Commodity Futures Modernization Act 

of 2000 (CFMA),17 finds that 

transactions subject to the CEA are 

affected with the national public 

interest because they provide a means 

for ‘‘managing and assuming price 

risks.’’ Section 3 of the Act also 

identifies price discovery and price 

dissemination as separate public 

interests warranting Federal 

regulation.18

Although repealed by the CFMA, 

former Section 5(g) 19 of the Act may be 

relevant to analyzing the findings and 

purposes discussed in Section 3 of the 

Act. Former Section 5(g) provided that 

the Commission could not designate a 

board of trade as a contract market 

unless the board of trade demonstrated 

that transactions for future delivery in 

the commodity for which designation as 

a contract market was sought ‘‘will not 

be contrary to the public interest.’’ 20

The public interest test of Section 5(g) 

included an ‘‘economic purpose’’ test, 

subject to a final test of the public 

interest.21 The economic purpose test 

applied under former Section 5(g) was 

used to prohibit the trading of certain 

contracts. Notably, the economic 

purpose test regarding contracts 

appropriate for trading on a futures 

exchange was not necessarily congruent 

with the scope of the Commission’s 

jurisdiction. Accordingly, while futures 

contracts that failed the economic 

purpose test were prohibited from 

trading on futures exchanges and thus 

illegal because of the on-exchange 

trading requirement, they (and any 

instrument with identical terms) 

remained futures contracts, fully subject 

to the Commission’s jurisdiction. 

By enacting the CFMA, Congress 

sought ‘‘to promote innovation for 

futures and derivatives and to reduce 

systemic risk by enhancing legal 

certainty in the markets for certain 

futures and derivatives 

transactions[.]’’ 22 As demonstrated by 

the IEM, innovative event markets have 

the capacity to facilitate the discovery of 

information, and thereby provide 

potential benefits to the public. Subject 

to certain exceptions, Section 4(c)(1) of 

the Act gives the Commission the 

authority to ‘‘promote responsible 

economic or financial innovation and 

fair competition’’ by exempting any 

transaction or class of transactions from 

any of the provisions of the Act, 

including the requirement that they 

trade on Commission-regulated markets, 

where the Commission determines that 

such action would be consistent with 

the public interest. Pursuant to Section 

4(c), Congress gave to ‘‘the Commission 

a means of providing certainty and 

stability to existing and emerging 

markets so that financial innovation and 

market development can proceed in an 

effective and competitive manner.’’ 23

Under Section 4(c), the Commission has 

the discretion to grant an exemption to 

certain classes of transactions without 

having to make a determination that 

such transactions are subject to the Act 

in the first instance.24 Notably, the 

Commission can use its Section 4(c) 


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exemptive authority not only on a caseby-case, or product-by-product basis, 

but may also use the authority to 

establish a set of regulatory provisions 

applicable to a defined class of 

products. 

V. Issues for Comment 

A. Request for Comment 

The following questions consider the 

Commission’s regulatory purview over 

event contracts, the interests that may 

appropriately underlie Commissionregulated transactions, and the 

appropriate regulatory treatment of 

event contracts. The Commission 

encourages comments on the specific 

questions posed, as well as the broad 

range of issues raised in this concept 

release. In providing comments, please 

describe your relevant experience and 

discuss in detail the facts and legal 

provisions that support your 

conclusions. Furthermore, please 

consider the Commission’s mandate to 

protect commodity futures and options 

markets and customers, and ensure the 

integrity of the commodity derivatives 

marketplace, as well as the expected 

effects of any Commission action on 

competition, efficiency, innovation and 

the financial integrity of transactions. 

Any recommendation with respect to 

the regulatory treatment of event 

contracts and markets should be 

consistent with and supported by the 

Act, practical, and amenable to effective 

and efficient implementation. 

B. Public Interest 

1. What public interests are served by 

event contracts that are designed and 

will principally be traded for 

information aggregation purposes and 

not for commercial risk management or 

pricing purposes? 

2. How are these interests consistent 

with the public interest goals embodied 

in the Act? 

3. What calculations, analyses, 

variables, and factors could be used to 

objectively determine the social value of 

information to the general public that 

may be discovered through trading in 

event contracts? Should this be a factor 

in determining whether the Commission 

plays a role in regulating these markets? 

C. Jurisdictional Determinations 

4. What characteristics or traits are 

common to or should be used to identify 

event contracts and event markets? 

5. How do these characteristics and 

traits differ from those of commodity 

futures and options contracts that 

customarily have been regulated by the 

Commission? How are they similar? 

6. Are there criteria based on the 

provisions of the Act that could be used 

to make jurisdictional determinations 

with respect to event contracts and 

markets? 

7. Given the purposes and history of 

the Act, would it be appropriate for the 

Commission to apply a test premised on 

commercial risk management or pricing 

functions to demarcate the 

Commission’s jurisdiction over 

particular contracts? If so, what factors 

could be used to make such a 

determination? 

8. Given the purposes and history of 

the Act, would it be appropriate for the 

Commission to apply any test premised 

on the economic purpose of certain 

types of transactions to demarcate the 

Commission’s jurisdiction over 

particular contracts? If so, what factors 

could be used to make such a 

determination? 

9. What calculations, analyses, 

variables and factors would be 

appropriate in determining whether the 

impact of an occurrence or contingency 

will result in a financial, commercial or 

economic consequence that is identified 

in Section 1a(13) of the Act? 

10. What calculations, analyses, 

variables, and factors would be 

appropriate in determining whether an 

economic or commercial index that is 

based on prices, rates, values, or levels 

should or should not qualify as an 

excluded commodity under Section 

1a(13) of the Act? 

11. What identifiable factors, 

statutorily based or otherwise, limit the 

events and measures that may underlie 

event contracts when such contracts are 

treated as Commission-regulated 

transactions? 

12. What objective and readily 

identifiable factors, statutorily based or 

otherwise, could be used to distinguish 

event contracts that could appropriately 

be traded under Commission oversight 

from transactions that may be viewed as 

the functional equivalent of gambling? 

13. The Commission notes that 

Section 12(e) of the Act generally 

provides that the CEA supersedes and 

preempts other laws, including state 

and local gaming and bucket shop laws, 

with respect to transactions executed on 

or subject to the rules of a Commissionregulated market, or with respect to 

transactions exempted from the Act 

pursuant to the Commission’s 

exemptive authority under Section 4(c) 

of the Act. What are the implications of 

possibly preempting state gaming laws 

with respect to event contracts and 

markets that are treated as Commissionregulated or exempted transactions? 

14. Should certain underlying events 

or measures—such as those based on 

assassinations or terrorist activities—be 

prohibited altogether due to the social 

perception and impact of such events? 

What statutory or other legal basis 

would support this treatment? 

15. Are there event contracts, such as 

political event contracts, that should be 

prohibited from trading under the Act, 

or that deserve separate treatment or 

consideration, due to the nature and 

importance of their outcomes? What 

statutory or other legal basis would 

support this treatment? 

D. Legal Implementation 

16. Is it appropriate for the 

Commission to direct certain or all 

event contracts onto markets that are 

regulated differently from and perhaps 

less stringently than DCMs? For 

example, it may be warranted or 

necessary to treat event markets that 

aggregate information solely for 

academic or research purposes, event 

markets set-up for internal corporate 

purposes, or event markets that offer 

exceedingly low notional value 

contracts to traders differently than 

markets that possess the attributes of 

traditional DCMs. 

17. Is it appropriate for the 

Commission to use the Section 4(c) 

exemptive authority of the Act for 

implementing a regulatory scheme for 

event contracts and markets? In this 

regard, the Commission notes that it has 

the discretion to grant an exemption 

under Section 4(c) to certain classes of 

transactions without having to make a 

determination as to whether such 

transactions are subject to the Act in the 

first instance. 

18. Is the issuance of staff no-action 

relief, such as the relief issued to the 

IEM, an appropriate or preferable means 

for establishing regulatory certainty for 

event contracts and markets? Is a policy 

statement appropriate or preferable? 

19. What are the benefits and 

drawbacks of permitting certain event 

markets to operate pursuant to 

Commission established conditions that 

are similar to the conditions under 

which the IEM operates? 

E. Market Participants 

20. Would it be appropriate to allow 

market participants, and in particular, 

retail customers, to trade on 

Commission-regulated event markets 

with the knowledge that the 

Commission may not be able to 

effectively monitor the measures or 

events that underlie certain event 

contracts? 

21. What unique protections and 

prophylactic measures are appropriate 

or necessary for the protection of retail 

users of event contracts and markets? 

22. What are the implications of 

permitting the intermediation of event 


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25674 Federal Register / Vol. 73, No. 89 / Wednesday, May 7, 2008 / Notices 

contracts, including intermediation on 

behalf of retail market participants, both 

with respect to trade execution and 

clearing? 

23. Are there any types of trader or 

intermediary conduct, peculiar to event 

contracts and markets, that should be 

prohibited or monitored closely by 

regulators? 

24. What other factors could impact 

the Commission’s ability, given its 

limited resources, to properly oversee or 

monitor trading in event contracts? 

Issued in Washington, DC, on May 1, 2008 

by the Commission. 

David A. Stawick, 

Secretary of the Commission. 

[FR Doc. E8–9981 Filed 5–6–08; 8:45 am] 

BILLING CODE 6351–01–P 

DEPARTMENT OF DEFENSE 

Office of the Secretary 

[Transmittal Nos. 08–49] 

36(b)(1) Arms Sales Notification 

AGENCY: Department of Defense, Defense 

Security Cooperation Agency. 

ACTION: Notice. 

SUMMARY: The Department of Defense is 

publishing the unclassified text of a 

section 36(b)(1) arms sales notification. 

This is published to fulfill the 

requirements of section 155 of Public 

Law 104–164 dated 21 July 1996. 

FOR FURTHER INFORMATION CONTACT: Ms. 

B. English, DSCAIDBO/CFM, (703) 601–

3740. 

The following is a copy of a letter to 

the Speaker of the House of 

Representatives, Transmittals 08–49 

with attached transmittal, policy 

justification, and Sensitivity of 

Technology. 

Dated: April 29, 2008. 

Patricia L. Toppings, 

OSD Federal Register Liaison Officer, 

Department of Defense. 


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