CFTC Questions British Import: Betting on Elections
So, as we’ve written recently, some entrepreneurs are seeking to make their fortune by betting on horses. With an election year now upon us, at least one other company has turned its attention to donkeys and elephants.
Last month, the North American Derivatives Exchange (“NADEX”), an online futures exchange wholly owned by U.K.-based IG Group Holdings plc, submitted to the CFTC a notice advising of its intention to offer five new “Political Election Event Derivatives.”
NADEX describes 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.
To prevent possible manipulation, NADEX prohibits all declared Presidential candidates from trading in the U.S. Presidency contract. Similarly, Senate candidates cannot trade on the outcome of the Senate contracts and Congressional candidates cannot trade on the outcome of the House contracts. Moreover, no member of the Electoral College may trade on the U.S. Presidency contract and “any individual who may have control or influence over the timing or outcome of the event underlying in any Political Event Derivative is precluded by exchange rule from trading that relevant contract.”
Despite these and other precautions, as well as NADEX’s painstaking explanation of why the contracts are permissible under the Commodity Exchange Act, the CFTC has commenced a 90-day review of NADEX’s contracts. The review is based on the possibility that these contracts may involve, among other issues, “gaming or an activity that is unlawful under any State or Federal law.” See CFTC Letter.
Comments on NADEX’s submission should be submitted on or before February 4, 2012. In addition, the CFTC seeks public comment on specific questions related to political event contracts to assist in its evaluation of NADEX’s submission. The CFTC’s 90-day review period ends on April 2, 2012 – a month after Super Tuesday, but the day before Washington, D.C., Maryland, Wisconsin, and Texas are scheduled to hold their primaries.