Risk Markets And Politics

Saturday, February 10, 2007

Non-obstacles to CFTC-regulated political event derivatives

Now that the CFTC has effectively begun regulating event derivatives, what obstacles might lie in the way of a DCM-hosted election market? Is there now greater ambiguity between futures trading and legal gambling? After all, couldn't a game of roulette be described as an event option? (I see no current statutory basis for that CFTC's policy of using "economic purpose" as a condition for jurisdiction over non-hybrid instruments.) The roulette example is a limit case, but Las Vegas bookmakers do quote spreads in presidential elections. Could such examples make the CFTC hesitate in approving more unique event derivatives?

No, they should not for the simple reason that Las Vegas propositions are not exchange-traded contracts. They are more like OTC forwards and warrants than futures and options. The CFTC has lilimited authority over non-forex, non-fraudulent off-exchange transactions.

Also, casinos do not derive any material revenue from games corresponding to the types of event contracts the CFTC would consider for approval, thus there is no real chance of casinos lobbying the relevant Congressional committees, the members of which have little affinity to gambling interests in any case.

Finally, there cannot be any doubt that political event derivatives serve an economic purpose. I think the chances are greater than 50% that presidential election contracts will trade on a DCM within the next 16 months. If not, the CFTC should seek statutory clarification of event derivatives going into their next reauthorization, although this should not be necessary in light of their approval of credit event futures and Hedgestreet's economic release options.

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