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Comment for Industry Filing 22-002

  • From: Angelo Lisboa
    J.P. Morgan Chase & Co

    Comment No: 69666
    Date: 9/7/2022

    Comment Text:

    I write to voice support for KalshiEX LLC’s filing to list political control markets.

    For the last 15 years, I have worked at JPMorgan, and I am currently a Managing Director in its private wealth management division. I noticed that one of the questions offered by the CFTC was asking whether elections have sufficiently predictable economic consequences in order to justify risk management products like that which Kalshi is proposing. I have deep experience with this problem in my time working at JPMorgan and I am happy to write detailing that in support of the contract’s approval.

    I have intimate experience with this. At JPMorgan, election risk is one of the largest risks our clients face, and they frequently engage us proactively on how to minimize it (hedge it, in other words). We work with and advise our clients on how to avoid that risk in their portfolios, especially when a client’s cash flows or investments are very politically sensitive (for example, those in the coal industry are very concerned regarding election outcomes and policy expectations).

    Since clients have different risk profiles, we do extensive research to fine-tune how these risks add up in our clients’ positions. Our division employs a team of economists, at service to our partners, whose role in election years is heavily to research election probabilities as well as the impact election outcomes will have on equities and other investment products. We frequently host discussions with experts and clients on the relevant risks (including one coming up this week!) and publish research for both clients and the public. For example, here we detailed how the results of the 2018 midterm cycles impacted financial markets. Here’s another example from another bank, Morgan Stanley where they provided a brief guide about how to manage risk before the current midterm elections.

    Many banks’ research often relies on prediction markets (for an example, check here). However, current prediction markets have a number of constraints that prevent them from operating with the best price accuracy possible. Permitting this contract would improve our and the public’s ability to forecast and manage the risks that really matter to them. There is great social value in these products.

    Risk stemming from the outcomes of changes in Congressional control (or the lack thereof) imply significant risks for holders of stocks, bonds, derivative products, and recipients of particular cash flows. Congress has broad power to affect changes in tax policy, government benefits, regulations, bureaucratic appointments, foreign and trade policy, immigration policy, and so many other facets that deeply affect industry. Although politicians hardly always keep their promises, markets consistently move based on changes in election expectations and outcomes. Far before policies come into place, deals are made on the basis of future expectations regarding policy, even if those expectations don’t always bear fruit (though they frequently do). If the private market is already trading and pricing this risk, it follows that such a risk is sufficiently predictable and a risk management product like Kalshi’s would be socially valuable.

    Large banks offer these to high networth and ultra rich clients, Kalshi is not the first to wonder how impactful it would be to bring these capabilities to the rest of the population who does not have access to desks at large banks and private wealth management services: we’ve been thinking about these types of instruments for a long time.

    Given my statement, and the large extent of hedging and pricing based on the expected policy outcomes of elections, it would be very strange for the CFTC to find that election contracts do not have regular and predictable hedging use cases. Not a single person in the industry would tell you different.

    I encourage the CFTC to swiftly approve Kalshi’s contract in order to complete markets and promote effective and innovative risk management tools.

    Angelo Lisboa

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