Want to Bet on the 2012 Election? The CFTC Says No

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By Paula Dwyer

U.S. regulators decided yesterday that a Chicago exchange couldn't offer futures contracts tied to the outcome of the 2012 elections. The reason: Such trades would amount to gambling, and that wouldn't serve the public interest.

It was news to me that the Commodity Futures Trading Commission even had the power to decide which futures contracts are in the public interest. That was my ignorance -- it's right there in the Commodity Exchange Act, section 5c(c)(5)(C)(i)(1).  It states that the CFTC can use the "public interest" rationale to bar trading or clearing of trades in six areas: activity that is unlawful under federal or state law, terrorism events, assassinations, wars, gaming or other "similar activity."

That makes me wonder: When is any futures contract not akin to gambling? And in whose "public interest" is the CFTC deciding?

Futures contracts are handy instruments that allow farmers, say, to put on a hedge in March what they think their corn crop will fetch in October, or airlines to hedge away the rising cost of jet fuel. Corn and oil futures are clearly in the public interest. But for a hedge to work, someone has to take the other side -- meaning, bet in the opposite direction. That someone is usually a speculator. The reasons why speculators take such positions are numerous, but mostly it's a gamble.

The CFTC's reasoning doesn't add up in other ways. The North American Derivatives Exchange sought approval to trade contracts tied to the outcome of the 2012 presidential race, or whether Democrats or Republicans would control the House and Senate next year. The company said the contracts would have allowed traders to take an economic position on the election's consequences.  It seems plausible that corporations, or private-equity partners, for example, would want to hedge against the possibility of a tax increase if President Barack Obama won a second term, but the CFTC didn't accept this.

That's curious. The CFTC already allows political events contracts to trade on the Iowa Electronic Market, sponsored by the University of Iowa. Another exchange, Intrade, also allows betting on election outcomes and economic indicators, but it's based in Ireland and therefore outside the CFTC's jurisdiction. Why wouldn't the CFTC want to bring that activity onshore, where it could be monitored and regulated?

What's more, the CFTC now allows trading of weather contracts tied to the amount of snowfall or the severity of the hurricane season. Why aren't these futures trades akin to gambling on the weather?

It would be easy to make the argument that naked credit default swaps on Greek sovereign debt (buying a CDS without owning the underlying debt) are no more than a bet on a Greek default. Will the CFTC be barring them, too?

(Paula Dwyer is a member of the Bloomberg View editorial board. Follow her on Twitter.)

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-0- Apr/03/2012 18:05 GMT