The CFTC Lacks the Capacity to Regulate Gambling The CFTC was never intended to serve as a regulatory agency over gaming activities and has neither the capacity nor the expertise to provide regulatory oversight at the level needed to protect consumers, prevent fraud and criminal infiltration, or protect against cheating and corruption. The CFTC is a statutory agency created under the Commodity Futures Trading Commission Act of 1974, charged with the responsibility of regulating futures and derivatives markets in order to promote market integrity, protect market participants, and ensure the proper functioning of price discovery and risk management mechanisms. Its mission is essential to protect both market participants and the broader public from fraud, manipulation, and systemic risk. As Congress considers reauthorization of this agency, we urge you to address the significant concerns raised by CFTC’s recent willingness to allow prediction markets to manipulate the authority of the CEA and the CFTC’s own regulations to offer event contracts that constitute illegal sports betting primarily designed to avoid state, tribal and other federal laws and regulations. The CEA, codified at 7 U.S.C. § 1 et seq., provides the CFTC with jurisdiction over “contracts of sale of a commodity for future delivery” and related derivatives. Congress has consistently reaffirmed that the purpose of this jurisdiction is to regulate markets that serve bona fide hedging and price-discovery functions that serve an inherent economic interest, not to authorize speculative gambling on the outcomes of events unrelated to economic commodities. The Commodity Futures Modernization Act of 2000 (“CFMA”) significantly deregulated derivatives markets, with an express goal of limiting regulation of over-the-counter swaps and energy derivatives. That law established a regulatory void that permitted the highly risky credit default swap market to flourish, which proved a key factor in the 2008 Financial Crisis. Congress acted to fill the regulatory voids created by the CFMA when it enacted the Dodd-Frank Act of 2010, which significantly overhauled the CFTC. While Dodd-Frank did not directly restore a broad economic purpose test, it did empower regulators, especially the CFTC, to use public interest standards, effectively bringing back aspects of the economic purpose test for new derivatives, particularly event contracts, by requiring evaluation for hedging/commercial uses versus pure gambling. Dodd-Frank amended the CEA at 7 U.S.C. §7a-2 (“Common Provisions Applicable to Registered Entities), which included a special rule for CFTC review and approval of event contracts and swaps. The special rule provides that the CFTC may determine that “agreement, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve – activity that is unlawful under any federal or state law; terrorism, assassination, war, gaming or other similar activity determined by the Commission by rule or regulation, to be contrary to the public interest.” On July 27, 2011, the CFTC published a regulation implementing the special rule under §7a-2. The regulation expressly provides that “[a] registered entity shall not list for trading or accept for clearing on or through the registered entity any of the following: (1) An agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, that involves, relates to, or references terrorism, assassination, war, gaming, or an activity that is unlawful under any State or Federal law; or (2) An agreement, contract, transaction, or swap based upon an excluded commodity, as defined in Section 1a(19)(iv) of the Act, which involves, relates to, or references an activity
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