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Don’t Bet on It

April 3, 2012

Photo by red betty black; some rights reserved.

In January, we wrote about a new import the North American Derivatives Exchange (“NADEX”), an on-line futures exchange wholly owned by U.K.-based IG Group Holdings plc, wanted to bring to the U.S.: “Political Election Event Derivatives.”

Yesterday, the CFTC officially said “no.”

NADEX described the contracts as a way of hedging against five possible 2012 election outcomes: (1) a Democratic majority in the U.S. House of Representatives; (2) a Republican majority in the U.S. House of Representatives; (3) a Democratic majority in the U.S. Senate; (4) a Republican majority in the U.S. Senate; and (5) the U.S. Presidency.

But the CFTC found that NADEX’s proposal was analogous to betting on elections, which many states prohibit. It further found that “the unpredictability of the specific economic consequences of an election means that the Political Event Contracts cannot reasonably be expected to be used for hedging purposes” and “there is no situation in which the Political Event Contracts’ prices could form the basis for the pricing of a commercial transaction involving a physical commodity, financial asset or service, which demonstrates that the Political Event Contracts have no price basing utility.”

Of course, it’s not within the CFTC’s purview to consider the entertainment value of election-betting. But maybe that’s why what happens in Vegas stays in Vegas.

View NADEX’s notice of proposal here.

View the CFTC’s order prohibiting the proposal here.

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