"Event Contracts Are a Step Too Far for Derivatives Regulation" by Ilya Beylin
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The University of Chicago Business Law Review

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77

Abstract

This Article develops two branches of history towards understanding derivatives markets and their regulation. First, using a comprehensive database of derivatives products that the Commodity Futures Trading Commission (CFTC) has authorized, this Article traces stages in the development of derivatives products. The empirical study examines key evolutionary steps from the birth of agricultural futures in the second half of the 1800s to where traders now bet on how long Taylor Swift’s most recent album dominates the Billboard 200, whether the President will pardon specific individuals, or how many times Bill Ackman (a notable hedge fund manager) accuses MIT professors of plagiarism. Second, the Article examines the statutory goals of the primary source of derivatives regulation: the Commodity Exchange Act (CEA). From their enunciation in the Grain Futures Act of 1922 to their most recent amendment under the Commodity Futures Modernization Act of 2000, these goals have consistently viewed derivatives as a means to benefiting Main Street rather than an ends in themselves. Specifically, the twin goals of the CEA are enabling hedging and price discovery in the “cash” markets underlying derivatives instruments. This Article argues that these goals may also serve as a limiting principle, enabling the CFTC to conclude that an instrument that fails to advance either goal is beyond the reach of the CEA. The jurisdictional boundary is significant because products the CFTC authorizes fall into the CFTC’s exclusive jurisdiction, preempting state law and displacing other federal regulation. This Article concludes that the CFTC has authority to require exchanges it regulates to delist a range of contracts (referred to as “event contracts” or “prediction products”) that fail to adequately serve the public interests motivating the CEA, instead shifting them to regulation under state law including state law restrictions on gambling. This approach is a powerful alternative to the strategy the CFTC has pursued in court to prevent exchanges from listing event contracts that settle on the basis of election outcomes and a narrow set of other socially sensitive activities.

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