CFTC Provides No-Action Relief to New Zealand University to Operate Not-for-Profit Market for Event Contracts
Commentary by Steven Lofchie
The CFTC Division of Market Oversight issued no-action relief to Victoria University of Wellington, New Zealand to operate an educational not-for-profit market for event contracts.
According to the letter, Victoria University's proposed market for event contracts is similar to the University of Iowa Electronic Markets ("IEM"), which were granted no-action relief by the CFTC Division of Trading and Markets in letters dated February 5, 1992 and June 18, 1993. Like the IEM, Victoria University's proposed market for event contracts (i) consists of submarkets for binary contracts concerning political elections and economic indicators, (ii) is operated for academic research purposes and (iii) offers no separate compensation to its operators.
See: CFTC Letter 14-130.
Commentary
As noted in the no-action request, the CFTC has prohibited CFTC-regulated exchanges from trading contracts involving certain political events. See "Order Prohibiting the Listing or Trading of Certain Political Event Contracts." According to the CFTC order, the reason that trading in contracts for political events is prohibited is because 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." That seems obviously wrong, given the immense power that the government has over the economy, and given that victory by one political party or the other likely would have predictable consequences for particular industries. (In fact, the argument that elections are not economically meaningful could be interpreted to mean that there is no meaningful difference between the parties, or that campaign promises have no value - a very cynical argument, indeed.)There might well be good reasons to prohibit futures trading on political events. If that is the case, then such trading should be banned for those good reasons (whatever they might be) and not on the premise (which seems incorrect on its face) that elections have no predictable economic consequences.