What Does “Financial, Commercial or Economic Consequence” Even Mean?
Part I: Was it meant to be a substitute for the economic purpose test?
3 Key Takeaways
Critical statutory term: “Financial, commercial or economic consequence” (“FCE”) shapes the future of sports gambling in America;
Personal regulatory story: A former CFTC regulator turned consultant offered rare insights into what Congress may have intended with the phrase; and
Possible substitution: FCE may have been designed as a modern replacement for the repealed economic purpose test.
Why This Term Matters So Much
The phrase “financial, commercial or economic consequence” is not just legal jargon, it is one of the keystones in determining whether sports event contracts fall under CFTC jurisdiction and/or whether they should be allowed or prohibited.
2000 CFMA: Introduced the excluded commodity concept, and with it the critical phrase FCE;
2010 Dodd-Frank: Repeated the phrase in defining swaps; and
Nevada litigation: Judge Gordon’s decision (PDF) hinged, in part, on this language.
We strongly believe that the “event vs. outcome” distinction drawn up by Judge Gordon is unlikely to hold up, but what about Judge Gordon’s position on FCE?
The challenge? Nobody really knows what FCE means.
Our Unique Insight: The ambiguity isn’t just academic. Behind the scenes, seasoned regulators and market architects wrestled with this very phrase, and one of them left behind a paper trail that may hold the key. His perspective, rarely discussed in public, suggests that “financial, commercial or economic consequence” could mean something other than most assume. To see how it all fits together–including why it matters for the future of sports gambling, let us tell you a story:
Enter Paul Architzel
Paul Architzel is the name that matters here. After a distinguished career at the CFTC, where he is often credited as architect of the CFMA (PDF), he transitioned into the industry first, then to private practice at Alston & Bird and later WilmerHale. Why does that matter? Because the phrase “financial, commercial or economic consequence” is a product of the CFMA–and Architzel’s fingerprints are all over it.
How we reached Paul is part of my own story. Around 2005-2006, I was finishing my dissertation at UCLA, a market microstructure study comparing Betfair’s peer-to-peer betting exchange with traditional bookmakers like William Hill and Ladbrokes. My market research pulled me into the orbit of AllSportsMarket® (“ASM”), a sports investing marketplace that originated in Costa Rica and was co-founded by Chris Rabalais and Ace Underhill. ASM was an ambitious attempt to turn sports into a new asset class, where fans could trade virtual shares of professional sports teams (not equity interests) and earn dividends both quarterly and every time their teams win. (Full disclosure: Chad and I are still actively working toward ASM’s development and achieving legal certainty, and we intend to bring it back to market when conditions align. ASM shut down long ago, attempted a comeback and was later faced with SEC litigation. It's a story for the ages, one that we will write about in the near future.)
ASM had some early traction and was searching for regulatory clarity. Chris knew he needed help, so he engaged an East Coast law firm that later referred him to Architzel. Shortly after, former CFTC Acting Chair and Commissioner, Sharon Brown-Hruska/NERA were tapped as economic advisors.
Architzel’s advice was candid. Skeptical of ASM’s regulatory chances in the wake of UIGEA,1 he urged Chris to block traders from the U.S. Chris listened, pivoted, and began developing another sports-based financial product: the SportsRiskIndex® (“SRI”), a weighted measure of the revenue potential of sports franchises based on factors like attendance and TV ratings. Performance on the field was not part of it–this was about the business side of sports.
Architzel’s Comment Letter
What makes Architzel’s role even more significant is the comment letter (PDF) he authored on behalf of ASM in response to the CFTC’s concept release on event contracts. In that letter, the phrase “financial, commercial or economic consequence” appeared no fewer than 21 times–a signal of just how important he believed it to be.
Architzel’s framing raises an intriguing possibility: Was “financial, commercial or economic consequence” simply a modern substitute for the repealed economic purpose test?
He wrote:
In formulating the definition of “excluded commodity,” Congress steered clear of the language of the economic purpose test of former section 5(g). Congress, at the time it enacted the CFMA, was aware that the economic purpose test was incorporated by the Commission in Guideline No. 1 of the Commission’s rules and chose nonetheless to repeal section 5(g) of the Act. Congress at that time chose to use different wording from the old economic purpose test in the definition of “excluded commodity”-an occurrence or contingency “associated with a financial, commercial or economic consequence.”
Architzel’s interpretation makes it sound like Congress’s drafting was more about continuity and less about a clean break. Perhaps, Congress was still contemplating a dividing line between gambling and legitimate futures trading, and chose FCE as its newest vehicle of choice. Elsewhere in the same letter, Architzel’s words framed that as a serious possibility:
Gaming contracts might be thought of as contracts that are dependent upon the outcome of discrete events that are not associated with a financial, commercial or economic consequence, but rather have utility only for their entertainment value. Thus, a contract that is contingent upon the outcome of a specific sporting event is unlikely to be associated with a financial, commercial or economic consequence and its primary or sole utility to the parties entering into the contract is its entertainment value.
Hmm. Most everybody, myself included, believes that FCE is a jurisdictional term. Paul, in this comment letter at least, saw it differently. That said, we would be remiss not to mention that he had earlier taken an approach that kept FCE firmly in the jurisdictional lane:
A broad interpretation of “excluded commodity” might include betting transactions on sporting and other events. Wagers on sporting events might satisfy the definition because, absent chicanery, the occurrence or contingency is not within the control of the parties to the relevant contract and the outcome may be “associated with an economic consequence,” i.e., a payout to the winner. A narrower interpretation would require the associated financial commercial or economic consequence to be other than a payment to the winning counterparty on the contract itself. However, even under the more restrictive reading, it could be argued that there are general economic consequences that could be associated with the outcome of high-visibility sporting events. These might include increases or decreases in restaurant receipts, subsequent advertising rates in local markets, or sales of particular types of merchandise. A broad reading of “excluded commodity” would therefore make such event-market wagering eligible for listing on an EBOT (albeit only between eligible participants.) Moreover, were such events to be considered to be “commodities,” they might even be offered on designated contract markets without restriction as to market participant. The CFTC has not yet provided guidance, however, as to how it interprets this language.
These are two very different interpretations, with very different consequences. The former would provide statutory continuity between the CFMA of 2000 and the Dodd-Frank Act of 2010, suggesting Congress never truly abandoned the economic purpose test. The latter frames Congress as having repealed the test hoping it may not be that critical anymore, only to walk it back through Dodd-Frank’s “gaming” prong. The colloquy (PDF) supports this view and we find it more plausible.
Why? For starters, it seems slightly absurd to argue that snowfall at Detroit’s Wayne County airport is associated with potential financial, commercial or economic consequences and last year's Super Bowl, an event watched by 127.7 million people, isn’t. And the Super Bowl ads? They’ve already sold out for 2026, fetching ~$7 million for a 30-second spot. The fact we had weather derivatives for a couple of decades and no sports event contracts, until very recently that is, is not necessarily because the latter is not associated with potential financial, commercial or economic consequence, but because it doesn’t serve an economic purpose. Almost everybody is in it for entertainment, and there are significant manipulation and integrity concerns.
More broadly, if FCE was intended to be a replacement for the economic purpose test, that would be suboptimal drafting by Congress. The jurisdiction and economic purpose questions are certainly connected and should be looked at together, but they are different inquiries. The fact that FCE language was retained in the construction of swaps, while the gaming prong entered the statute elsewhere strongly suggests that FCE is part of the jurisdictional inquiry. It helps define the boundaries of the CFTC’s authority (the jurisdiction question) but doesn’t dictate which futures contracts should be permitted or prohibited (the gaming/economic purpose question).
Even under that “jurisdiction” interpretation, however, multiple schools of thought as to what FCE means have already emerged in litigation and we’ll tackle those in our next post. Before we let you go though, aren’t you wondering what happened to the SRI?
The SportsRiskIndex Story
This debate over how to interpret FCE was not abstract. It directly shaped the development of the SportsRiskIndex, which is designed to measure franchise revenue potential and the associated SRI futures that would allow the sports industry to hedge relevant risks. By 2008, the SRI seemed poised for launch: The product was solid, the CFTC was engaged, and an exchange partner was in place. But the advisor bills were mounting, and the Europe-based angel investor who funded most of the business needed additional support. I asked my parents to contribute a low-six figures amount. They heard and believed in the passion of my voice and agreed without hesitation–a gesture of trust and confidence for which I’ll always be grateful.
Then the Great Recession hit. Our designated contract market partner collapsed, the angel investor could not continue, and I wasn’t in a position to contribute more myself. Without another DCM to step in, the SRI had to be shelved.
Final Thoughts
SRI’s setback was not legal or regulatory, it was commercial. No corners were cut, no shortcuts were taken. It just so happened the timing did not work out.
Not everything was lost, however. At the very least, the experience was instrumental in forcing us to confront the reality that financial innovation is only as good as the clarity of its legal foundation. A legal solid foundation alone doesn’t guarantee commercial success, other factors must also align. But it’s a prerequisite; without it, financial innovation may reach temporary commercial success (see prediction markets) but they are doomed to fail eventually.
The SRI never launched, but the experience seeded a conviction: New markets cannot thrive without clarity in law and policy. That conviction is why this blog exists. Each post is not just analysis–it’s part of a broader effort to ensure that innovation and regulation evolve together, with enough precision to protect and enough vision to inspire.
More generally on sports performance, Architzel said: “I doubt that the CFTC would ever find a contract acceptable that relies on specific-performance related outcomes.” How times have changed.