by throwaway2037 | 2026-01-09 08:46:01+00:00
Some related background: Credit Default Swaps (CDS) are a way to buy and sell "credit event" insurance (bankruptcy, late payments, etc.). In practice, the insurance pricing part doesn't work very well, but it provides a good, if small, marketplace for speculators on both sides to bet on the likelihood of (1) credit events and (2) recovery (what % of debt can be salvaged after a credit event). Interestingly, this near real-time information has a bi-directional feedback loop versus the equity price (if listed). Last I knew, all of these contracts are OTC (over the counter) but follow an industry standard template called an ISDA agreement. (These are actively used in the largest securities markets in the world: North America, Europe, and Japan.)

On the surface, it sounds pretty simple -- as an institutional investor, you can buy and sell insurance for credit events on corporations and nations. In practice, there are simple credit events, and there are complex credit events (example: how are minority vs majority state owned enterprises handled during credit events... complex!) About the second type: There has been near continuous lawsuits and arguments over the last 20 years about what exactly is covered by the standard ISDA agreement. How recovery is determined (how the CDS settles is actually separate from the actual recovery because the actual one can take years) has also been the subject of heavy debate. Also, there have been less-than-ethical market participants who have tried to manipulate various events to trigger or delay them... or affect recovery rates. All of these have been subject to lawsuits and/or regulator investigations. I'm not an expert in this product, but the results of all of this legal activity has served to further clarify what exactly is covered by these ISDA agreements. (I think there have been minor adjustments to them over the years.)

Mind you: These arguments are happening between highly sophisticated parties and governed by excellent legal systems and well-respected regulators (US/EU/JP).

For this case of Polymarket's behaviour, I'm not surprised that this "bet" ran into trouble. After all, if your entity is governed by the laws of Panama, well then, all bets are off. I have nothing against Panama, but there is probably a good reason that large numbers of offshore commercial contracts are not subject to Panamanian law (like they are for New York, London, Paris, Tokyo, etc.) -- trust is low and their contract law and accompanying legal system probably pales into comparison to the world's best. The solution seems to be for a competitor to emerge that willingly submits to a serious regulator and legal jurisdiction. Personally, I don't see this happening any time soon. Just like crypto exchanges before, I wondered why the world's largest investment banks did not start one of their own. In hindsight, the answer is obvious: Legal and reputational risk, not limited to AML/KYC. I am wondering the same right now about "predictions markets".

Hot take: Can we stop using this slimy term "predictions markets" and just call it "gambling for geopolitical events"? That feels more honest to me.