In March 2021, a futures exchange, ErisX, voluntarily withdrew an application with the Commodity Futures Trading Commission ("CFTC," the main derivatives regulator) to list a futures contract tied to events in NFL games such as point spread and total points. It had become clear that the CFTC was going to reject it as a "prohibited event contract." The issue likely would have faded away except that one of the CFTC's five commissioners, Brian Quintenz, released a statement "blowing the whistle" on the non-public agency process and questioning the CFTC's authority. Join Commissioner Quintenz for a discussion.
- Hon. Brian D. Quintenz, Commissioner, Commodity Futures Trading Commission
- Moderator: Gary Kalbaugh, Special Professor of Law, Maurice A. Dean School of Law
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As always, the Federalist Society takes no position on particular legal or public policy issues; all expressions of opinion are those of the speaker.
Dean Reuter: Welcome to Teleforum, a podcast of The Federalist Society's practice groups. I’m Dean Reuter, Vice President, General Counsel, and Director of Practice Groups at The Federalist Society. For exclusive access to live recordings of practice group teleforum calls, become a Federalist Society member today at fedsoc.org.
Evelyn Hildebrand: Welcome to The Federalist Society’s webinar this afternoon on May 24. We are joined today for a conversation with Commissioner Brian D. Quintenz of the Commodity Futures Trading Commission. My name is Evelyn Hildebrand, and I’m an associate director of Practice Groups at The Federalist Society. As always, please note that all expressions of opinion are those of the experts on today’s call.
Professor Gary Kalbaugh will be moderating this afternoon, and I will introduce him. He will introduce the Commissioner following his introduction. Professor Kalbaugh is a Special Professor of Law at the Maurice A. Deane School of Law. And he’s the author of Derivatives Law and Regulation, which is going into its third edition. He is also an executive committee member of the Financial Services and E-Regulation Practice Group of The Federalist Society.
After our speaker gives his opening remarks, we will turn to you, the audience, for questions, so be thinking of those as we go along and have them in mind for that portion of this afternoon’s event. If you do have a question, please enter it via the chat of the Q&A tab, and our speaker will be able to address those questions that you submit.
With that, thank you for being with us today. Gary, the floor is yours.
Prof. Gary Kalbaugh: Excellent. Thank you, Evelyn. So today we have Commissioner Quintenz. Commissioner Quintenz was unanimously confirmed by the United States Senate as a CFTC commissioner, and he was sworn into office on August 15, 2017. So he has a solid nearly four-year timeline of service on the commission and to the American public.
One of the things that I especially like about Commissioner Quintenz’s background -- well, there’s a lot to like. But one of the things I especially like is he has a background being on the side of the regulated entity because previous to being on the commission, he founded and served as Managing Principal and Chief Investment Officer of what we call in the industry a Commodity Pool Operator, which is basically like an investment fund that’s focusing on trading futures, and derivatives, and other instruments.
Before that, he was at Hill Townsend Capital, which is a registered investment advisor. So he’s had a real background in finance. He understands the business side. He’s been on the business side. And even before that, he was Senior Policy Advisor for Congresswoman Deborah Pryce, so he’s really had an exposure from a variety of perspectives. He graduated magna cum laude from Duke University with a major in public policy studies, and he has his MBA from Georgetown University, where he was in Phi Beta Gamma. Commissioner, thank you first of all. Thank you for being here.
Hon. Brian D. Quintenz: Thank you, Gary. It’s great to be with you. It’s such an honor to be with The Federalist Society. Hopefully, you can hear me, and you can see me, but we’ll power through if we have any technical difficulties. But regardless, it’s quite an honor.
Prof. Gary Kalbaugh: Excellent. Absolutely. Well, I do see you right now, and I hear you. So those are two good -- so Commissioner Quintenz, ErisX is a futures exchange registered with the Commodity Futures Trading Commission. And they sought to list a new futures contract. Now, this is usually done by what we call self-certification. So a futures exchange says, “Hey, we’re going to list this contract so people can trade it,” and they just give notice of that, and time passes, and automatically, they don’t need to do anything else. They’re deemed able to list it and offer it to traders.
However, here, instead of letting the contract be listed, the CFTC issued a 90-day stay. Why did that happen? What were the issues prompting this?
Hon. Brian D. Quintenz: Well, thanks, Gary. Given that you’re a very prestigious derivatives attorney, I know you probably wouldn't start with a question of “what is the CFTC?” But maybe for your viewers, we might just go there since it’s a very important agency that regulates in a very, very large and critical marketplace, but isn’t one that is on the tip of the tongue at family dinner tables. Although, that is a very appropriate place for it to be, given that --
Prof. Gary Kalbaugh: -- Just have everybody over for dinner, Commissioner Quintenz.
Hon. Brian D. Quintenz: Yeah. Well, that’s what I talk about at the dinner table, so maybe you don’t want to come over to my house. Again, it would be an actually appropriate place for it, given that we regulate futures contracts and derivatives contracts on commodities; on things like agricultural products, corn, wheat, soybeans; on things like energy products, oil, natural gas; on metals, on gold, silver, platinum; and then even into financial products, like interest rate derivatives, credit derivatives, stock index derivatives.
And any derivative contract on a commodity needs to be listed on a what we call a designated contract market, a DCM, an exchange, that is registered with the commission and regulated by the commission.
And you’re right that since around 2000, 2001, exchanges have been given the opportunity to self-certify, that new contract that they are listing meet the requirements of our core statute of the Commodity Exchange Act, of the CEA. And the reason that that was done in the Commodity Futures Modernization Act of 2000 was to try to take away the misalignment of incentives from the regulator in the marketplace and allow for more innovation to occur.
And if you think about the incentives of a regulator, there’s really only downside, reputational downside, and a lot of risk in allowing new and innovative products to come to market if they have to put their stamp of approval on it as opposed to getting credit for all the innovation that occurs. Although, I honestly think that some of us have that viewpoint as well and would probably take that philosophical position, but the data bears that out.
From 1920 to 2000, when the commission and its precursor agencies actually had to approve contracts, there were about 800 contracts that were listed across that time period. From 2001 until about 2018, once exchanges were able to self-certify that themselves and somewhat disintermediate the agency, even thought there was a review process for certain contracts, over 12,000 contracts were listed during that time period.
And I would suggest that none of those caused the financial crisis. None of those have caused systemic risk. They have provided enormous benefits to the economy from hedging purposes and price formation, and they contribute, I think, very fundamentally to economic growth and, to some degree, price stability that we see in the grocery stores and hopefully at the gas pump, or, at least, certainly without those, that we would see a lot more.
So ErisX, yes, did file a self-certification of a contract that --
Prof. Gary Kalbaugh: -- If I may just interrupt, just with one -- there’s actually a study on onions that was done. As you know, there’s a ban on trading onion futures. I won’t bore everybody on this, even though it’s a really cool story as to why it happened. But in 1957, onions futures were banned, and when you mentioned price stability, Commissioner, there was a study done by an economist about a decade after the ban which showed that the ban had harmed price stability of onions. So I just wanted to ratify what you noted and note that there’s empiricism behind that.
Hon. Brian D. Quintenz: I didn’t know that. I’ll have to watch the onion prices at the grocery store more closely from now on. But there are two things that are specifically not allowed for recognized commodities, which are movie receipts, box office receipts for movies, and onions, which have their own back stories, and it’s a fascinating research project.
But, Gary, you’re right. So ErisX is a registered exchange with the commission, and they filed a self-certification to list contracts involving NFL football games on the money line, the point spread, and the total points scored. Now, a lot of folks may ask themselves, “Well, Brian, you talked about agriculture products, like corn, and wheat, and oil, and natural gas, and metals, and interest rates. Why are NFL football games in the CFTC’s jurisdiction?”
And the reason is because the Commodity Exchange Act, the CEA, includes a section that defines commodities as any occurrence, or the extent of occurrence, or a contingency that is out of the control of two parties to the contract and has the financial, commercial, or economic consequence, so, writ large, an event. If there is an event and then there is a contract on that event in the future, then it is considered a commodity derivative and therefore needs to be listed by a regulated exchange.
Prof. Gary Kalbaugh: Sounds like everything.
Hon. Brian D. Quintenz: So it basically is, except there was a provision added by Dodd-Fank—and we’ll get into this, I think, in a minute—that specifically referenced event contracts that had certain enumerated activities, namely war, terrorism, assassination, or gaming, or activities that violated federal or state laws as something that the commission could determine was contrary to the public interest and that therefore the statute would prohibit.
Because there was some thinking at the agency that contracts on NFL futures games resembled traditional gaming, gambling activity, those contracts got put into a special 90-day stay that was created by a regulation, the regulation 40.11, which we’ll refer to I think going forward, 40.11, that specifically referenced this section that was added to the CEA by Dodd-Frank around event contracts involving war, or terrorism, assassination, or gaming.
Prof. Gary Kalbaugh: Okay. So to frame it, the CFTC had to take an affirmative step to initiate this 90-day review, and it was done by stating that this proposed contract was in a category known as event contracts that are covered by this rule, that I think we’ll talk about later, 40.11. So I just want to make sure I understand. Is the CFTC required to prevent the listing of a contract that’s considered gambling, because you mentioned that this seems like it was gambling, and that’s why they did their 90-day review.
And I’m wondering what’s the difference between gambling and speculating because I can go on a futures exchange and set up an account with a commodities broker, and say, “Hey, I think corn’s going to go up.” I’m not doing it for any reason. It’s not because I’m producing corn. I’m not processing it. I’m just doing it because I’m making a bet. So what’s the difference?
Hon. Brian D. Quintenz: So let me start with the second question first. And I think the difference between speculating and gambling depends on who you ask because I think a lot of people have a position that any activity, including speculating or including fundamental investing, has a degree of gambling in it.
And I disagree with that, and I think it’s very important to understand a philosophical difference or, at least what I view as a strong economic difference between the two, regardless of how certain things may be defined by state. And that’s an important point too that we’ll get to, I think, later.
I think of gaming or gambling as risking something of value for a game or an outcome of pure chance that has no otherwise economic utility to it. So if I think about roulette, for instance, while there are certain strategies that people can use around how to play it, the outcome is purely chance driven. And that outcome, in and of itself, has no economic or price formation utility.
And how I would think about speculation is that it is a non-chance outcome that has some predictive elements to it that does have a legitimate economic or price formation impact that, therefore, businesses can use to hedge risk. And so there are a couple of pieces of that.
But to me, one of the important points around gaming versus how I think about speculating is complete chance versus some level of predictive or analytical capability or skill, as well as the underlying event having no economic value or utility versus something that can have an economic utility in the economy or to an individual or business.
So I’ll pause there for a second, but I think you’re other question was, are we required to prevent event contracts that involve gaming? And the answer is that the statute does not require us to, but the regulation that we wrote in response to the statute does require us to. And that’s, I think, where we’re going with this conversation, and it might be helpful if I actually just read the statute out loud so folks can have the benefit of what it says.
Prof. Gary Kalbaugh: Yeah. I’m going to type the citation, Commissioner, on the chat box while you read it out so that everybody could have the citation, so people can have the citation.
Hon. Brian D. Quintenz: Okay. So the citation says, “In connection with the listing of agreement, contracts, or transactions, and excluded commodities, that are based on the occurrence of extent of occurrence, or contingency, the commission may determine that such agreements, contracts, or transactions are contrary to the public interest if the agreements, contracts, or transactions involve one of these enumerated activities: activity that is unlawful under federal or state law on terrorism, assassination, war, gaming, or other similar activity determined by the commission by rule of regulation to be contrary to the public interest.”
And then the act itself creates a prohibition that, “No agreement, contract, or transaction, determined by the commission to be contrary to the public interest, may be listed or may be available for clearing or trading.”
Before I get to the regulation, I think there are a couple of important things to point out about the statute. The first is, is that I think -- and this gets a little bit back to the point around thinking about any event and a contract on that event as being inherently related to gaming or gambling. The language of the statute specifically excludes that because it carves out a type of event contract that is gaming. If all event contracts were gaming, there would be no need to reference an event contract that was gaming or that involved gaming.
Prof. Gary Kalbaugh: Are you saying because it would be redundant then?
Hon. Brian D. Quintenz: That would be my presumption, yeah, that if all event contracts are gaming, then there would be no need to sub-list gaming as an activity in this specific section of the CEA.
The second important thing about the statute is that the presumption isn’t that all of those contracts should be illegal. The presumption is that they are all flatly and unequivocally allowed, unless the commission makes a determination that any, or a group of them, or all of them are contrary to the public interest.
The third thing is that there’s no requirement that the CFTC make such a determination or make any finding on any of those contracts. So if the CFTC did nothing, then legally, a contract involving terrorism or assassination would be perfectly legal under the statute. If we made no determination that a contract like that was contrary to the public interest, then those contracts would be perfectly legal to trade, so we are not required by the statute to make any determination at all on any of these.
The fourth issue with the statute is that the only criteria that it lists for us to consider in making that determination is a contrary to the public interest standard. There is no further description of that standard, no further guidelines, no further restrictions, or principles around which that decision should be made.
And the last is that, as a I said, I think, at the end of my reading of the statute, it’s not the commission that prohibits the listing of the contracts. It’s the commission that determines they’re contrary to the public interest, and then it’s the law, the statute that says once that determination has been made, the statute then prohibits them. So let me pause there for a second then before we get to the regs.
Prof. Gary Kalbaugh: Absolutely. Thank you, Commissioner. So what we have is we have this exchange does the self-certification for this contract on NFL outcomes. We have a statute that says that the Commodity of Futures Trading Commission may do a 90-day review for event contracts related to gambling, which may or not have been this particular contract that the exchange was submitting for self-certification. That’s an open question, whether it was an event contract related to gaming.
But there’s a standard for it. There’s a presumption they’re allowed, and the standard is unless they’re contrary to the public interest, and the Commodity Futures Trading Commission could've, during this whole time, just done nothing. They weren’t required to jump in and opine on it at all. It’s part of the point of self-certification.
I do have a question where I just also wanted to mention about speculation because what you noted about the role of speculators, to me, it’s really important, and the way you described speculation versus gambling I found very helpful. And there’s a case, a Supreme Court case, Merrill Lynch v. Curran. You’re probably very familiar with it, Commissioner. And the Supreme Court took notice that the advent of speculation in futures markets produced well-recognized benefits for producers and processors of agricultural commodities. They’re using this example of agricultural—this was 1982—that was predominantly what was traded at that time.
A farmer that takes a short position in the futures market is protected against a price decline. A processor who takes a long position is protected against a price increase. Such hedging is facilitated by the availability of speculators willing to assume the market risks that the hedging farmer or processor wants to avoid.
So in a sense, if Gary’s a farmer, and at that moment, there’s no baker who’s ready to buy my wheat in advance on the market, maybe, instead of me having to wait till that perfect moment where that perfect person’s here, maybe, a speculators there trading with me in the meantime. And that speculator will profit a little bit when later they trade with a third party, with somebody else like the baker when the baker does come online. So I found that really helpful.
I just want to ask though, so you noted that the CFTC didn’t need to take a position on this. But what happened, as I understand it, is that the exchange voluntarily withdrew their application. I’m going to presume—and you can elucidate us—I’m going to presume that was because they perceived that there might be an adverse decision by the commission. I’m just guessing.
What motivated you to issue your statement informing the public on what happened behind the scenes? You issued a statement that you weren’t forced to issue, but it seemed like you wanted to provide some daylight so the public could see what had happened here. What was your motivation for doing that?
Hon. Brian D. Quintenz: Well, the motivation was, first and foremost, I think -- well, I think it was a couple of things. The first was to describe some serious constitutional concerns with the statute as well as our regulation, to describe some violations I saw of the Administrative Procedures Act and how that regulation was issued, and written, and conducted, and then to take a lot of issue with the analysis in the proposed order.
And I do reference in my statement that the agency had proposed an order for commissioner review and vote that would have classified these NFL contracts as gaming contracts that would've have found them to lack hedging utility, and therefore would be contrary to the public interest and also opine that they could further enable sports betting in the derivatives markets, and therefore proposed to not allow them to trade.
The 90-day process could have concluded in basically two ways. It could've concluded with the staff making a determination that it could not or would not ban these contracts or that they did not reference gaming and therefore were allowable, in which case there would be no order upon which the commissioners would vote, and the exchange would just be allowed to list them, and there would be very little legal analysis provided to the public.
There would probably have been an internal memo that would've been circulated, discussing some of that legal analysis. And hopefully, I or some of my fellow commissioners may have decided to opine on some of that legal analysis while these contracts were allowed to trade.
The other scenario with that is one that kind of happened, which is the commission decided to say that the contracts should not be allowed, proposed an order to the commission that if the commission approved it by vote, it would therefore negate the contracts and basically make them illegal to trade on the DCM.
By withdrawing the contracts, I believe, a day or two days before the 90-day review period was set to expire -- and this proposed order would have seen the light of day, I think, one way or the other. It was my opinion that not only was that legal analysis in the order as well as some of the descriptions in the memo, that was not going to be provided to the public, and my ability to raise my objections to it may have been negated by the withdrawal.
And so I decided to something, which I think is unusual, and what’s described as unusual, which is to issue a statement on an order that was not voted on by the commission on a contract that was withdrawn for self-certification to try to provide some clarity around what the legal analysis was that I saw and my opinion of it.
Prof. Gary Kalbaugh: So to me, it does strike me as unusual in the sense that I haven’t encountered that before. I’d also say it was a great public service because people like me were aware that it had happened. We had known that ErisX had submitted the application because that’s public, but after that, the process was completely opaque until you issued your statement. And as you know, this wasn’t just some small item. It seems to me that it raises some serious legal and constitutional issues that never were able to be deliberated in public.
So I want to ask you, you make arguments in that statement. You make arguments based on the Constitution—the CFTC’s actual regulation is 40.11 that we discussed—and law, mainly the Administrative Procedures Act, that the CFTC’s de facto preclusion of the listing of the contract was wrong, that it was wrong. So it’s not just that there wasn’t any process per se, but their actual preclusion of listing the contract was wrong.
Let’s start with the Constitution. Among others, the Constitution is explicit in granting the Congress legislative powers. And for that reason, and among others, there are limits in the authority that Congress can delegate. Congress can’t say, “We don’t want to do any penal law statutes anymore, so we’re just going to have this committee of 10 really smart individuals do it for us.” They can’t. The Constitution says—and it’s called the nondelegation doctrine—the limits of what they can and can’t delegate, we’ve looked generally to the Supreme Court to delineate that.
There’s a recent case, Gundy v. United States. I think it was 2019. And that case hinted obiter at a more robust assertion of the nondelegation doctrine by the Supreme Court. How does the court’s obiter dicta in Gundy, and the nondelegation doctrine generally, how does it apply here to a futures exchange seeking to list futures tied to National Football League game events?
Hon. Brian D. Quintenz: Yeah. So let me start by saying that when that decision came out, I read a fascinating article that described how unusual the decision was for Justice Alito to join the majority on an eight-person court in order to issue a concurrence that basically said he would like to see these issues revisited and, in doing so, allowed Justice Gorsuch to write a dissent that I think provided a lot of intellectual firepower and legal analysis to address exactly these kinds of issues.
And if that hadn’t been done -- and I’m not an attorney. I have to mention that. We’re getting into some pretty heavy legal issues and talking about the Supreme Court, and I’m not an attorney. As you said, I have an MBA, so hopefully, I’ll manage through this. It took a lot of research to get this written, and I had some good help and some original thinking to get it done, but we’ll see how we do.
But I was just fascinated that from a process perspective, that choice was made to allow for that thinking to be aired. If justices would have voted their conscience, it appears that though it would have been a 4-4 decision, that would’ve just allowed the case to be remanded back to a lower court without the ability to issue opinions and provide clarity on the thinking. It’s somewhat similar maybe me issuing a statement on a withdrawn ErisX contract and an order that was never voted on by the commission, I guess.
So I paid attention to that because it was so curious to me in reading about it. I just saw a news article, and then I started delving into the issues. And the first thing that came to my mind was event contracts and the sole requirement from Congress or the CFTC to arbitrarily undertake decisions on whether or not contracts and otherwise legal economic and financial market activity would be allowed, solely based on a generic public interest determination with no other requirements or refinements or guidance in the statute.
And while I’m sure you and your colleagues are very familiar with the intelligent principal concept around nondelegation issues, I just wanted to read a part of Justice Gorsuch’s dissent, which says, “To determine whether a statute provides an intelligible principle, we must ask ‘Does the statute assign to the Executive only the responsibility to make factual findings? Does it set forth the facts that the executive must consider and the criteria against which to measure them? And most importantly, did Congress, and not the Executive Branch, make the policy judgments?’ Only then can we say that the statute contains the kind of intelligible principle the Constitution demands.”
And in my view, the commission was given complete discretion around an arbitrary process on how to legalize or prohibit otherwise lawful economic and financial market activity because it permits but does not require the commission to make these determinations, it provides no guidance to the commission in terms of how to do that, and it’s silent on any applicable rules to govern that process.
So I’m kind of at a loss as to how anyone could judge whether or not our decisions on something being contrary to the public interest actually met Congress’s intent around that kind of decision making. How would someone be able to say, “That’s not what Congress meant for you to decide,” or “We have no yardstick against which to judge or measure the validity of the agency’s determination.”
And there was another court case, a longer time ago, the Panama Refining case, that we brought up, that I think Gorsuch also mentioned in his dissent, that said an unconstitutional delegation in the statute that provided no requirement or no definition of circumstances under which the Executive Branch should take action. I think that’s just as relevant here as it was there.
Prof. Gary Kalbaugh: So Commissioner, one of the questions we were asked is, what’s the definition of “contrary to the public interest”? And that was from Tom Palmer. And I think you’re saying to Tom and to the rest of us you’d like a little more guidance on what that is. That’s Congress’s primary job, right, to determine what’s in the public interest. If Congress had provided a more detailed framer, for making that determination, would you see the constitutional issues falling away?
Hon. Brian D. Quintenz: I think there’s the potential for that, yeah. I think, to me, this fits it squarely in an egregious, as an example, of an unconstitutional delegation that is almost anything. I think there is some important background to put into play here, which involves a self-certification process because before the self-certification process existed, it was up to the exchanges to prove to the commission that their contracts were in the public interest through an economic purpose test.
And the economic purpose test involved its hedging utility and its price formation. When that process that was exchanged-led in a burden of proof on the exchanges, on a proactive and affirmative public interest determination was removed by the Commodity Futures Modernization Act, there was no economic purpose test in the statutes. There was no affirmative burden on exchanges to provide contracts that met any of those requirements, and when the new section on event contracts was created 10, 12 years later under Dodd-Frank and public interest was inserted back in, there was some thinking at the commission that that meant that the same test that exchanges had used before could now be used by the commission to review public interest.
And I don’t think that’s necessarily the case. I think that it would probably -- it needs to take a lot more explicit format. And I think just going through this example around NFL futures contracts, the Murphy case, the Murphy v. NCAA case, which prevented the federal government from making sports betting illegal in states, allowed for the proliferation of legalized state gaming and state legalized sporting books.
Prof. Gary Kalbaugh: Commissioner, before Murphy, there’s a federal law that prohibited every state except for Nevada, I think?
Hon. Brian D. Quintenz: Yeah.
Prof. Gary Kalbaugh: Yeah. And it prevented every other state from allowing sports gambling. And the Supreme Court struck that down in Murphy, which didn’t legalize gambling in each state on sports events, but it made it possible for any states, if they wished, to legalize it. They had opened the door to it.
Hon. Brian D. Quintenz: Yeah.
Prof. Gary Kalbaugh: Okay.
Hon. Brian D. Quintenz: Yeah. And so what happened then was that a number of states did that, and state-legalized and regulated sports books were offered to the residents of those states. And one of the claims of the NFL futures contracts by ErisX was that the dynamics of that activity created a lopsided sports book for the home team in those jurisdictions because wagering activity was heavily placed on the home team, and those sports books couldn't adjust the line to remain economically competitive with other options, and if the home team won, exposed them to a lot of risk. I think that there’s a lot of analysis that could go into whether or not that -- how robust of a claim that is, but I do see some relationship to an economic purpose under now state-legalized activity.
But getting back to just the generic sense of public interest, there are so many potential public interests that we could consider. One would just be our financial stability agreement. We regulate some of the most significant prudential institutions in the world through a clearing house. And if our sense of the public interest was financial stability, and we viewed these contracts and their impact on financial stability through the lens of the public interest, we could make one determination.
Another could be the economic prosperity around sports economies, and how much economic activity is involved in local economies that depend on sporting events, and whether or not these event contracts could provide price information to the marketplace into those businesses to hedge risk. One could be a sense of fairness and access to sports gaming through the futures markets. One could be a regulatory versus a dark market. One could be perceptions around the integrity of the derivatives market. One could be the use of the commission’s limited resources and how it should --
Prof. Gary Kalbaugh: -- It’s amorphous, and it’s really -- it ends up being whoever’s opinion.
Hon. Brian D. Quintenz: I think that’s right, and I think that that’s why I personally have such a problem with this kind of language and, me, as an unelected, unaccountable commissioner making that decision on behalf of the entire American public, as opposed to putting that decision where it has the most accountability and direct response to the public for its consequences, which in my view is Congress.
Prof. Gary Kalbaugh: So you give such excellent examples, Commissioner, of how amorphous the term public interest is. And Tom, thank you for answering the question as well. I just want to mention that, for asking the question, because it shows that it allows anyone to read whatever their preferences might be, in good faith, by the way. I’m not suggesting even in bad faith, like my very personal preferences, but it ends up being quite a personal reading, as you know. It could be commissioned resources. You just illustrate it so well.
So moving on from the constitutional issues just for a moment. I’m going to confess something, Commissioner. When I looked at the statute, and I looked at the rule based on the statute 40.11, I didn’t see daylight between them. I was wrong because when you look at them more carefully, there’s a difference between them. And one of the things you noted in your statement, and you said, “There’s a real big bridge that was attempted to be bridged from what the statute told the commission they can do and from what the actual regulation said.”
And I believe you have concerns about whether that was even consistent with the Administrative Procedures Act, how much a difference there is between them. So could you talk about he difference between the statute and the regulation and your concerns about that?
Hon. Brian D. Quintenz: Yeah, sure. So I think there are a couple of things there. The first, to me, is what we talked about when I was addressing the statute, which is that, in my view, there’s no ambiguity in the statute in terms of what’s legal. Without a determination of something that’s contrary to the public interest, any event contract, in referencing anything, including these enumerated activities, are illegal.
The regulation itself -- and here, maybe, it’s best if I just read it. It says, “Prohibition: a registered entity shall not list for trading or accept for clearing any of the following: an agreement, contract, transaction, or swap based on excluded commodity, referencing terrorism, war, assassination, or gaming, or activity that is also under any state law or federal law.” And that’s all we get.
The proposed regulation actually, I think, shines a little light on the commission’s thinking around that order because it basically says pursuant to Dodd-Frank Section 745(b) that authorizes the commission to prohibit these contracts, these contracts are thereby prohibited.
And so there are two things there. The first is that we don’t have the authority to prohibit those contracts. We can just make a public interest determination that they are contrary to the public interest. And then it is the statute itself that prohibits any contract that we have found is contrary to the public interest. So the regulation, in my view, contradicts the legal status of any of these event contracts and did not justify reaching the conclusion that they are contrary to the public interest.
I think as we just described, there are certain valid, potential hedging utility and price formation impacts from contracts that could be currently or could historically have been considered a gaming contract. And I don’t believe that a blanket prohibition through a misinterpretation of the statute that was read to declare a blanket prohibition is appropriate in an order that’s legally sound. So in my view, the regulation that we issued, 40.11, in 2012, before I was here, in 2012, violated the APA and is not legally sound.
Prof. Gary Kalbaugh: So if you were already there, Commissioner, it would've never been implemented. The final rule would've finalized in the form it was.
Hon. Brian D. Quintenz: Let me pause there for a second, Gary, because I do have to put some context around that. That was a very busy time at the commission. I have a lot of respect for the commissioners that were there at that time. This, I think, was probably viewed as a very minor rule. It might’ve been one of 20 that they were doing on a Thursday, and then they had another meeting on Friday. I believe that this probably wasn’t something that a lot of folks paid a lot of attention to, and it took me a number of readings of it to try to understand what it was saying and why it said what it did. I’m not sure I would've found that out without that benefit.
Prof. Gary Kalbaugh: And I want to just make a statement about the Commodity Futures Trading Commission, a completely fair statement. They are one of the most accessible collegial commissions out there. So, yeah, I’m not surprised, and I think your candor is very much -- well, your candor’s very much appreciated.
So I just wanted to ask you a final question about this, and then I have some more things I wanted just to get the full story, but we also had some really good questions I wanted to throw out there in the meantime that have been coming up from folks. But in addition to these other deficiencies -- so we have the Constitution. We have the disjunction between what the statute says and what the rule says. You assert that the CFTC’s initial order requiring the 90-day review of what would've been a self-certification, you suggest in your statement that that was arbitrary and capricious. Why?
Hon. Brian D. Quintenz: Yeah, a number of reasons. There’s fruit of the poisonous tree and then there’s just -- it keeps on proliferating all the way down, unfortunately. And the order was no better, if not worse, than I think the reg and the statute. And again, I want to give the staff a lot of credit. These are difficult issues.
I think it gets back to our sense of reputation and how willing any staff member is to go to the chair of a commission and say, “Hey, I’m sorry, there’s nothing we can do. You’re going have to answer to Congress about why futures markets are allowing NFL gaming contracts.” So I do want to recognize the professionalism of the staff here and understand how hard of an issue this is to try to analyze and put before the commission.
But in my view, the proposed order that came before us, and that may have been issued had it actually gone through the full voting process, in my view, would've been arbitrary and capricious for a few reasons. The first is that it flipped the presumption on who needed to prove what. In my view, the statute very clearly says all of these contracts are legal unless the CFTC determines any or all of them are contrary to public interest, whereas the order said the record in this matter does not show that these contracts have a valid hedging utility.
So therefore, the commission put the onus on the exchange to prove that they were in the public interest because it was relying on the regulation that already declared they were against the public interest, in my view, incorrectly.
Prof. Gary Kalbaugh: Artificially reversing the natural presumptions.
Hon. Brian D. Quintenz: Artificially reversing the natural presumption and the burden on who needed to prove what. In my view, the commission had not proven -- Gary, can you still see me? You’re frozen on my computer.
Prof. Gary Kalbaugh: Yeah. I can see you fine, Commissioner.
Hon. Brian D. Quintenz: Okay, good. In reversing the presumption as well as reversing the burden on who needed to prove what. In my view, the commission did not prove that contracts involving gaming as a blanket class were contrary to public interest, and then it created a burden on the exchange to prove them wrong, which I think was inappropriate.
The second is that I think it failed to consider the public comments. As I said, it said that the record in the matter failed to prove that they had a valid hedging utility, and out of the 25 comment letters that we received, 13 of them, including ErisX’s own submission, did go through an argument around the hedging utility of these contracts.
Now, the commission may disagree with that analysis, but to just blanketly state that the record showed no hedging utility or failed to provide a hedging utility, to me, both ignores the comments and seems to have established some kind of test that the commission was using, which was not disclosed, around what rises to the level of providing a hedging utility.
The third is that I think the commission arbitrarily defined gaming, and the reason being that it relied on the definitions of a number of state laws around what gaming is, I think, because they were really trying to cite references to sports events and sporting games as gaming activity. But a number of those state-level gaming definitions included listing any event that was outside of the control of the two parties as something on which a wager would be considered gaming.
So that directly contradicts, in my view, the language of the statute, which creates a subclass of event contracts that can involve gaming, meaning that there is a broader group of event contracts that does not. So by using state law to define gaming and referencing sports contracts, I think, we arbitrarily selected those pieces of state law as opposed to recognizing the other pieces of the state law, which would have conflicted with our statute itself.
And the last was—I think I made reference to this earlier—there was a reference that the commission could consider other factors in making its determination under the statute, and the only other factor that we listed in this proposed order was that these contracts could potentially promote sports gaming in the futures market. And to me, there are a lot of other factors that we could consider, a lot of other tests. And to me, it wasn’t necessarily valid, especially because I disagreed with some level of an assessment around speculative activity versus gaming activity.
Prof. Gary Kalbaugh: So Commissioner, we got two questions. One’s related to the constitutional arguments, the other one to the disjunction between the statute and the regulation. So first, I’m going to ask you the question we received from the Honorable Douglas Smith related to the constitutional arguments because he notes that Justice Rehnquist strongly argued to strengthen the nondelegation doctrine, only to have even Justice Scalia conclude that nondelegation litigation would end up impairing the courts rather than executive administrators.
And I understand this is more of a policy question, but he asked, do you think that consequence would result and is that better or worse for democracy and accountability, because I guess what he’s saying is, if the Congress isn’t the sovereign of what authority they have to delegate, and if they wanted -- then it’s going to be the courts. So either we have an entity embedded in the Executive Branch exercising these powers, or we have—he’s suggesting de facto—the court exercising it.
Hon. Brian D. Quintenz: So I think I told you I’m not an attorney. So let’s throw that out again. It also seems to me like that is a similar debate that is taking place across multiple courts and multiple jurisdictions around whether or not it’s the court’s job to prescribe what it views as appropriate guidelines around delegations or the things that put the court into more of the policymaking rule as opposed to the executive agencies.
In my view, it’s sufficient for the court to say there aren’t enough guidelines. There aren’t enough concrete requirements or constraints for an agency or the Executive Branch to conduct this activity, especially in the independent agency space, where again, I really view myself as an unaccountable regulator. If I start making policy decisions, there’s not a lot of recourse on me for the consequences.
Prof. Gary Kalbaugh: Yeah. We didn’t elect you. The American people don’t have any direct nexus with you in that sense.
Hon. Brian D. Quintenz: I serve a five-year term. A calendar date’s set. And there’s always the possibility for impeachment. I’m not sure that that’s necessarily what the framers had in mind in terms of accountability for public policy determinations in Article I.
Prof. Gary Kalbaugh: Sure. Let me ask you the other question from Jacob Rudman. He mentions this EA section 5(c)(c), 5(c), and he mentions that section, and he says, “Does it allow the commission in any -- ignoring 40.11, does it allow this commission in any circumstance to prohibit categories of certain event contracts by regulation?” And he says, “Does it help the commission does have some guidance” and says, “the public interest factor set forth in the commodity exchange events Section 15(a).”
Hon. Brian D. Quintenz: So I think what he’s referencing is something that Commissioner Berkovitz referenced in his statement, which came out about a week after mine did on this topic, and I’m thrilled that Commissioner Berkovitz provided his thinking on this. I have a lot of respect for Dan. He served as a former general counsel. And I think there’s that potential, although public interest was specifically listed in this section around these kinds of contracts. And I would assume that it’s -- I think there’s an argument there, but I would assume that it was not necessarily done to only reference what was in the statute in 15(a).
As I said, I think there are a lot of other considerations that could go into the public interest around event contracts that specifically reference these kinds of enumerated activities. I think there could be an argument there. The other thing to think about though is that, if the staff were to argue, or if the commission were to argue via a vote of the commission, that a certain event contract did not have a hedging a utility and did not have a price formation aspect to it, then you could probably argue that that event does not have a financial, commercial, or economic consequence and therefore is not an excluded commodity under the definitions section in the CEA. So I think that gets pretty tricky, but I would also recommend Commissioner Berkovitz’s statement on this subject matter too.
Prof. Gary Kalbaugh: So we started five minutes late. We’re going to go until 5:35. We only have four more minutes, and we understand if people have a hard stop, they have a hard stop. But we’re just going to go for four more minutes.
You mentioned Commissioner Berkovitz’s release, and I wanted to ask you about that. One of the things with ErisX’s submission is that it would've limited the trading of these contracts to what are called eligible contract participants, which is a fancy way to say nonretail investors, folks with a million or more in liquid assets, stuff like that, companies with $5 million or $10 million, depending on what they’re doing, in assets.
So we’re talking about nonretail, whereas normally, futures exchanges are available to any retail investor. Commissioner Berkovitz had some concerns about that. And I think because he realized, “Well, if it were open to retail market, the gambling entities wouldn’t really benefit from it because people wouldn't use them, arguably. They’d just go straight to the exchange.” And so he had some concerns about that. Is that relevant that the contract is limited to only eligible contract participants as proposed?
Hon. Brian D. Quintenz: I think his statement had a number of important points. I don’t want to get into what I disagreed with too much because he’s not here to talk about it with me and interact on it.
But I did find it very interesting that Commissioner Berkovitz said that he felt that there could be gaming contracts that were legal and that the commission could approve, in my view, without modifying 40.11, because I didn’t see or remember him calling for that, which specifically categorized all contracts involving gaming as contrary to the public interest. So I find it interesting that Commissioner Berkovitz did describe a hypothetical scenario that gaming contracts could be allowed.
Another interesting thing is that he referenced price formation as a valid economic utility under the economic purpose test that I described as, in my view, not being reinstated in the statute, but something to which he referred. And the staff and the commission has seemed to focus a lot on hedging utility in the absence of price formation, and my statement focused on price formation as well. And I think you saw that in my description of speculation versus betting and gaming. And so I think that that’s an important point to consider, that price formation and the impacts are market-based activity around probabilistic events can have a very significant economic impact beyond hedging purposes.
And then to your point around fair access, I think that that’s another fascinating point, and there are a lot of things to consider there. One is that ErisX may want to do a precluded debate around retail participation in a contract that is very close to historic gaming activity and wanting to limit it to ECPs. There could've have been a competitiveness argument along with that, that you cite.
I think about it conversely, which is that the commission has been reluctant to think about event contracts that don’t have a finite amount of potential loss associated with their size. To me, if we really are focused on hedging activity as a core purpose—but I also think price formation is important—then that would actually negate the ability of some very large businesses to utilize some of these event contracts for that hedging purpose. And so there are a lot of conflicting things around this debate, and around economic purpose, and around equal access that the final chapter hasn’t been written.
Prof. Gary Kalbaugh: Well, Commissioner Quintenz, we could go for another hour, and we haven’t even started talking about football, so we can definitely go on. I just wanted to thank you for your personal generosity, for your service to the country because you had no obligation to issue that statement, and you did it for the public good. I wanted to thank you for both of them and taking the time today. Thank you, Commissioner.
Hon. Brian D. Quintenz: Thanks so much, Gary. Again, it was honor to be with you. Thank you to all the participants. I valued being with you today.
Prof. Gary Kalbaugh: And now I’m going to turn it over to my colleague, Evelyn, who’s going to just share some final remarks about some upcoming events.
Evelyn Hildebrand: Thank you very much, both of you. I want to thank both of our speakers, our moderator, and our expert this afternoon for the benefit of their valuable time and expertise. And I want to thank our audience for participating and sending in your questions. We welcome listener feedback by email at firstname.lastname@example.org. As always, keep an eye on our website and your emails for announcements about upcoming teleforum calls and virtual events. Thank you all for joining us today. We are adjourned.
Dean Reuter: Thank you for listening to this episode of Teleforum, a podcast of The Federalist Society’s practice groups. For more information about The Federalist Society, the practice groups, and to become a Federalist Society member, please visit our website at fedsoc.org.