Comment Text:
I am writing to express my strong opposition to the CFTC's proposed rule to ban election contracts. This proposal represents a significant overreach of the CFTC's regulatory authority and fails to recognize the numerous benefits that these markets provide for hedging and price discovery. I urge the Commission to reconsider this proposal and engage more deeply with industry stakeholders to understand the full implications of such a ban.
Overstepping Regulatory Authority
The CFTC's primary mandate is to regulate the derivatives markets to ensure they are fair, transparent, and free from manipulation. However, by proposing to ban election contracts, the CFTC is stepping far beyond its Congressional mandate. Election contracts serve a legitimate economic purpose by allowing individuals and businesses to hedge against political risks that can have significant financial implications. The CFTC's role should be to regulate these markets to ensure they operate fairly, not to ban them outright.
Commissioner Summer Mersinger has rightly pointed out that this proposal exceeds the CFTC's authority. The agency's attempt to classify election contracts as "gaming" is an arbitrary expansion of its regulatory scope. This move not only undermines the CFTC's credibility but also sets a dangerous precedent for overregulation in other areas of the financial markets.
Benefits of Election Markets
Hedging Political Risk
Election outcomes have profound economic consequences. Businesses and investors often face significant uncertainty around elections, which can affect everything from tax policy to regulatory environments. Election contracts provide a valuable tool for hedging against these risks. For example, a company heavily invested in renewable energy may want to hedge against the risk of a political shift that favors fossil fuels. By banning these contracts, the CFTC would be removing an important risk management tool from the market.
Price Discovery and Information Aggregation
Election markets also play a crucial role in price discovery and information aggregation. These markets have consistently provided more accurate forecasts than traditional polling methods. The prices of election contracts reflect the collective wisdom of market participants, offering a real-time gauge of public sentiment. This data is invaluable not only to investors but also to policymakers, journalists, and researchers who rely on accurate information to make informed decisions.
The Need for Engagement with Stakeholders
The CFTC's proposal has sparked significant backlash from industry participants, including prediction markets like Kalshi and PredictIt. These platforms have highlighted the benefits of election markets and have called for a more collaborative approach to regulation. Instead of imposing a blanket ban, the CFTC should engage with these stakeholders to develop a regulatory framework that addresses any legitimate concerns while preserving the benefits of these markets.
John Aristotle Phillips, co-founder and CEO of PredictIt, has described the proposal as "ill-conceived" and a "mistake." He has urged the Commission to embrace innovation and formulate a reasonable regulatory framework that keeps Americans in regulated U.S. markets rather than pushing this valuable activity offshore. This sentiment is echoed by many in the industry who believe that a collaborative approach would be far more effective in addressing the CFTC's concerns.
In conclusion, the CFTC's proposed ban on election contracts is an unnecessary and harmful overreach that fails to recognize the significant benefits these markets provide. Election contracts serve important economic functions by allowing for hedging against political risks and providing valuable price discovery and information aggregation. I strongly urge the Commission to vote against this proposal and instead engage with industry stakeholders to develop a balanced regulatory framework that preserves these benefits while addressing any legitimate concerns.
Thank you for considering my comments.
