Comment Text:
In response to the questions posed at 91 FR 12516 s. II.F. paragraph 33: At least some existing event contracts are not “swaps.” Ordinary swaps and futures are derived from economic metrics. Some common examples of such economic metrics are securities, interest rates, and foreign currencies. All of those metrics have economic value: A security generates a cash flow; The Fed controls interest rates, which affects lending rates that ripple throughout the economy; Currencies measure a country’s relative strength or weakness against other currencies. These are “fundamental” values. When you invest in a derivative, you are investing in a “fundamental” value that results in economic consequence that is (this is a key point) independent from the actual outcome of the contract. I buy interest rate swaps because the Fed will decrease rates to stimulate the economy, not because I think it randomly picked to raise or lower rates. The value of securities, interest rates, and foreign currency exchange rates also have an intrinsic ("book") value that is independent of the contract ("market") value.
Unlike the common economic metrics that underlie swaps and futures, many events underlying popular event contracts do not have any reasonably ascertainable intrinsic value. The market is the best gauge for the probability and value of the event's occurrence. Sure, some events might serve a hedging function for distant financial risk. But other events will not have any reasonably measurable value until they either do or do not occur. The events in that latter category are gambling.
Here are two real-life examples of event contracts to consider. Yesterday, I placed a bet ("purchased a contract") that Jeff Probst would say “rope” on the next episode of Survivor. Whether Jeff says “rope” is so attenuated from any economic consequence that bettors cannot determine an intrinsic value of the contract. Instead, the “economic consequence” is the consequence from the outcome - I win or lose - and the odds are set based on how people “feel” about one side or the other. That describes speculation and is gambling. The best argument I can make for the hedging function of “rope” is this: I have hedged against the risk that Paramount loses value, because CBS lost viewership, because Survivor is less entertaining, because they didn’t air a rope challenge. But even then, the contract doesn’t depend on whether Survivor aired a rope challenge. It depends on whether Jeff Probst decided to say “rope.” What effect does Jeff Probst saying “rope” have on anything? I mean, maybe try to look at previous episodes to see whether Jeff saying “rope” correlated to an episode’s viewership. It probably didn’t because Jeff saying “rope” didn’t actually have any “consequence” as this question describes, and even the most sophisticated traders probably wouldn’t foresee “rope” to have any meaningful consequence.
There’s a more difficult example. I own a small amount of Google stock. Earlier, I bet on the words that would be said during Google’s Q1 2026 earnings call. While I placed the bets mainly for fun, the bets were functionally a hedge against Google’s loss of reputation. When someone bets that Google won’t say “Gemini,” they hedge the risk that Google’s investors on the call might lose confidence when Google doesn’t say “Gemini.” Whether Google says “Gemini” on its earnings call to investors could have a more direct effect on investor confidence and, consequently, Google’s market value. Even still, it is one-step removed from Google’s actual choice to pursue or not pursue Gemini as a business venture.
Event contracts like “rope” probably do not have enough of an economic or financial consequence to justify being considered swaps. Therefore, I think "rope"-like event contracts should be heavily regulated or outright banned. Event contracts like “Gemini” might have economic or financial consequence, and that decision I will leave to those who know more than I do.
Thank you for considering my comment(s).
