Comment Text:
In response to question 10, the role of event contracts in managing price risks, discovering prices, and disseminating pricing information, I would like to highlight the case of contracts concerning actions taken by regulatory agencies against companies. I will refer to these as Regulatory Event Contracts (REC).
Responsive to question 32: Could the Commission confirm the trading rules regarding REC markets so they can aggregate the data with the most value for the public? That depends on company employees being able to trade. One way to formalize this is to codify the nonprofit/research event-contract pathway the Commission acknowledges in footnote 6 of this ANPRM (citing the IEM and PredictIt no-action letters). RECs would be a natural example.
The mechanics work as follows. Buying a REC pays out to the holder if the regulatory event occurs; selling collects a premium and creates a payout obligation if the event occurs. Each trading party has a natural use case:
- Customers buy to express concern about a product or insure against product failure. Companies can issue RECs free to customers with each product purchase in amounts proportional to the price, in which case the contract functions as a direct warranty.
- Companies sell to write warranties or signal confidence, and buy to hedge exposure later. A buy-back raises the price of warranty contracts customers hold, transferring capital to customers rather than to shareholders as a standard stock buyback would. Because the contingent liability can be discharged only by preventing the event, the warranty-and-hedge sequence functions as a verifiable remediation commitment.
- Employees, affected customers under NDAs, and other holders of material information trade to convert private knowledge into a price signal without disclosing the underlying facts. Unlike whistleblower bounty programs, which require disclosing facts to a regulator and concentrate the reward on whoever files first, REC position size scales with conviction and the venue is open to every informed holder simultaneously.
- Speculators take market views on the probability of the regulatory event, which is in substance a continuous price for the company's brand, distinct from the cash flows and voting rights of equity.
The signal also has natural readers, who use the market without trading it:
- Media read prices, volumes, and open interest to identify cases where consensus capital is backing concern, and convert that into public attention. Existing complaint channels produce nothing comparable across companies or industries.
- Regulators read the same signals to prioritize among cases competing for limited investigative capacity. Price ranks consensus probability; open interest ranks the magnitude of capital backing concern.
The trading produces three layers of public disclosure: the REC price, public volume and open interest, and (for public companies) the company's own trading activity visible through existing financial-disclosure mechanisms. Read together, these compound into stronger inferences than any one alone. An investor seeing a low REC price next to a large company short position can see the company defending the price. A long position taken by the company on itself signals stronger contrarian conviction, because the company is paying premiums where it would normally collect them. No new disclosure regime is required.
With the mechanics in place, the trading rules follow.
Permitted to trade:
- Company employees (including those under employment NDAs) should be permitted to trade. They are the natural source of the highest-quality price signal a market can produce, and act as whistleblowers in market form, staking capital instead of disclosing facts.
- Affected customers, including those bound by settlement NDAs, should be permitted to trade. A customer who has just settled and signed an NDA can roll the settlement money directly into RECs if they feel strongly about the underlying issue.
Restricted from trading:
- Agency employees, contractors, and detailees with access to the resolving event should not trade. Same logic that already restricts federal employees, members of Congress, and judges from trading on information from their position: they can move the event itself.
- D&Os of the reference company should be restricted in personal capacity (same logic that restricts them from trading their own stock on inside information), but permitted to trade on behalf of the company under structured rules analogous to stock buyback rules.
Allowing these holders of private information (information that would be MNPI in equity markets or restricted under an NDA) to signal through price serves the public interest. Such a market would:
1. Unify all federal regulatory regimes through a single market-driven interface. Stakeholder concern about products in commerce is today scattered across more than thirty semi-private federal channels (FDA Form 3500, NHTSA Vehicle Owner Questionnaires, CFPB consumer complaints, SEC TCRs, FCA qui tam filings, FAA Service Difficulty Reports, EPA ECHO, OSHA §11(c) complaints, HHS-OIG hotline, state AG portals, and dozens more) processing roughly fifteen million reporter submissions per year, none of which aggregate into a public consensus signal. An REC market centralizes that attention into public, comparable prices. Each agency's published outputs (FDA Enforcement Report database, NHTSA recall database, CPSC announcements, USDA FSIS releases, FAA Airworthiness Directives, JPML transfer orders, SEC enforcement actions, DOJ FCA settlements) are already authoritative public records suitable for oracle resolution; no new disclosure regime is needed. The framework generalizes uniformly across executive recalls, judicial MDL formations, consent decrees, and class certifications, allowing one rule across all of them rather than industry-by-industry rulemaking. Consistent with the Future-Proof "minimum effective dose" philosophy.
2. Give regulators a market-disciplined action queue that no current channel produces. Existing federal channels do not rank submissions, and most receive substantially more reports than they can investigate. A market produces a real-time prioritization signal that bureaucratic intake systems structurally cannot.
3. Function as a parallel disclosure layer that doesn't require breaking confidentiality. Employment contracts and settlement agreements routinely include confidentiality clauses that bind employees and affected customers from speaking publicly about what they know. The price moves; regulators observe; the aggregate price is the disclosure. The SEC has brought dozens of enforcement actions since 2015 against contract language that suppresses whistleblower communication, each one empirical evidence that the practice persists at scale.
4. Price and hedge a tail risk that no current instrument captures well. The pattern across Bayer-Monsanto, Boeing 737 MAX, Volkswagen dieselgate, Merck Vioxx, J&J talc, Wells Fargo, Equifax, Theranos, Wirecard, and roughly twenty similar cases is consistent: information existed for years, the equity market didn't price it, then a trigger event landed and the stock collapsed in a single session. Cumulative market-cap destruction across these cases runs into the trillions. An REC market with informed participants would have moved continuously toward 1.0 over the months and years before each trigger, dragging the equity-implied probability with it; the repricing would have been earlier, smaller, and continuous. The hedging side falls out naturally: investors with regulatory-exposed equity could offset part of the tail without selling the underlying, and companies could hedge events going against them. RECs would do for regulatory-action risk what credit default swaps did for credit risk: give participants a clean instrument to express a view directly, rather than filtering it through equity or other indirect positions.
5. Bypass corporate ringfencing. When a parent pushes exposure into a thinly capitalized subsidiary that cannot adequately satisfy the liability it creates, the structure typically limits recovery for affected customers in tort or bankruptcy. RECs route around this: the counterparty on a REC is another contract holder, not the subsidiary, so customers profit on the regulatory action regardless of whether the subsidiary has the assets to pay a judgment or survive bankruptcy. To maximize liquidity, contracts would initially reference controlling companies, aggregating regulatory exposure across the entire portfolio in a single instrument. This encourages D&Os to engage with risks at every subsidiary rather than compartmentalizing them. Contracts on specific subsidiaries or products become possible as liquidity develops.
6. Work for private companies, not just public ones. Public companies have a discontinuous, badly fitted equity signal; private companies have nothing observable. RECs give both a continuous, transparent probability of regulatory action. They can reference any company producing regulated products without requiring the company's involvement and without the operational burdens of going public. This is particularly valuable for private equity investors, who have no real-time public-sentiment signal to fall back on.
7. Create natural pressure for remediation. A high REC price is a signal to the manufacturer that consensus has formed. Remediation taken in response is a market-clearing event. Over time, the venue could anchor settlement infrastructure where holders receive prompt resolution rather than years of litigation, and companies resolve exposure proactively at favorable terms.
I'm happy to provide more detail in writing or in a meeting. Thank you for considering this comment.
Respectfully,
Nico Cserepy
OpenClaim Inc. (capacity noted for context only; this is a personal comment)
