As discussed further below, the contracts traded on prediction markets may fall within the definition in the Commodity Exchange Act (CEA) of the term “swap.” 3 The contracts may also be contracts for the future delivery of a commodity (futures contracts) that are covered by the CEA. 4 A prediction market which offers swaps or futures contracts for trading by the general public must register with the CFTC as a designated contract market (DCM), which the Commission is charged with overseeing. 5 Since the early 1990s, parties have sought Commission staff guidance regarding prediction markets, and the Commission first designated a prediction market as a DCM in February 2004. 6 While the term “event contract” is not a defined term in the CEA or the CFTC’s regulations thereunder, the CFTC has used this term to describe derivative contracts, typically with a binary payoff structure, based on the outcome of an underlying
3 See CEA section 1a(47), 7 U.S.C. 1a(47). 4 See CEA section 2a(1)(A), 7 U.S.C. 2(a)(1)(A).
5 See Id. , which expressly extends the CFTC’s “exclusive jurisdiction” to encompass “transactions involving swaps or contracts of sale of a commodity for future delivery … traded or executed on a contract market designated pursuant to [CEA section 5, 7 U.S.C. 7] ….” The CFTC shares jurisdiction over mixed swaps and security futures with the Securities and Exchange Commission (SEC), and the SEC has sole jurisdiction over security-based swaps. See section 1a(44) of the CEA, 7 U.S.C. 1a(44) and sections 3(a)(55) and 3(a)(68) of the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. 78c(a)(55) and 78c(a)(68). See also section 712(d)(1) of Title VII of the Wall Street Transparency and Accountability Act of 2010 (Dodd-Frank Act) (directing the CFTC and SEC to undertake joint rulemaking on covered topics). 6 See CFTC Order of Designation for HedgeStreet, Inc. (Feb. 20, 2004), available at https://www.cftc.gov/sites/default/files/opa/press04/opa4894-04.htm . The Commission’s Division of Market Oversight issued staff no-action positions to two academic institutions. The no-action positions provide that, subject to specified terms, staff will not recommend enforcement action for operating prediction markets, without registration as a DCM, swap execution facility, or foreign board of trade, that offer trading in political and economic indicator event contracts for academic purposes. See CFTC Staff Letter No. 93-66 issued to the University of Iowa (June 18, 1993), available at https://www.cftc.gov/sites/default/files/idc/groups/public/@lrlettergeneral/documents/letter/93-66.pdf . This no-action position superseded a more limited no-action position issued in 1992. See also CFTC Staff Letter No. 14-130 issued to Victoria University of Wellington, New Zealand (Oct. 29, 2014), available at https://www.cftc.gov/csl/14-130/download .
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