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APPENDIX B (CONFIDENTIAL) – FURTHER CONSIDERATIONS 

Risk mitigation purpose of the Contract: The economic impacts of natural disasters like 

hurricanes, floods, tornadoes, and earthquakes are vast and varied. They can be both immediate 

and long-term, affecting a wide range of stakeholders including governments, businesses, and 

individuals. This Contract specifically seeks to target a major disaster hitting a particular city, 

allowing businesses and individuals to hedge the risk that their residence is affected by one of 

these disasters. This would allow them to cover the uncertain costs that come with these 

disasters, which could affect their business, their ability to travel, their infrastructure, and more. 

Here's a detailed breakdown of the economic impacts of these events: 

1. Hurricanes. American coastlines--from Houston to Tampa to New York--are battered by 

hurricanes every year. Such storms often bring significant flooding, power outages, and 

other disruption of essential services. Hurricane Sandy in 2012 caused over $60 billion in 

economic losses. 2017’s Hurricane Harvey caused the largest evacuation in US history 

with an estimated 3.7 million Americans fleeing the city. Max wind speeds (as 

represented by Hurricane Category Numbers) are a good proxy for total damage done. 

Category 5 hurricanes are extremely rare but will likely cause billions of dollars in 

damage with a great cost to infrastructure. Category 1 hurricanes will likely cause some 

damage with a good risk of power outages. In short, the size of the storm is a good proxy 

for the damage the storm will inflict. Investors can use the proposed contract to hedge the 

risk of disruption from a hurricane or tropical storm. In the last five years, Atlantic 

hurricanes have killed over 3,000 people, and inflicted over $393 billion worth of 

damage. Hurricanes and tropical storms can destroy homes, businesses, and key 

infrastructure. Such damage can take years and billions of dollars to repair, weighing 

heavily on local governments, insurance companies, and taxpayers. 

2. Floods. When floods inundate a region, one of the most immediate and apparent 

repercussions is the extensive damage to infrastructure. Roads, bridges, public transport 

networks, and utilities crumble under the onslaught of water. The monetary costs of 

repairing these essential elements are vast, often pushing local or even national budgets to 

their limits. But the economic ripples extend further. With damaged infrastructure, 

businesses face interruptions, transport costs escalate, and potential investors, witnessing 

the tangible vulnerabilities of an area, might think twice before investing. Agriculture, the 

bedrock of many economies, suffers a dual blow. In the immediate aftermath, there's the 

visible destruction of crops, leading to direct income losses for farmers, not to mention 

the heart-wrenching death of livestock in many instances. However, the land remembers 

the floodwaters long after they recede. Soil erosion can impair land productivity for 

subsequent agricultural seasons, while the specter of waterborne diseases threatens the 

health and productivity of surviving livestock. 

3. Tornadoes. From an economic perspective, the damage wrought by a single tornado can 

be colossal. Infrastructure, from residential homes to commercial establishments, often 

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bear the brunt of this devastation. Repairs and rebuilding efforts post-tornado can stretch 

local budgets, placing enormous financial strains on both public and private entities. 

Often, many small businesses, lacking the necessary insurance or funds to recover, shut 

down permanently, leading to a decline in local economic activity and employment. 

Beyond the immediate tangible destruction, tornadoes carry with them long-term 

economic implications. Areas frequently hit by tornadoes may witness a decline in 

property values as potential homeowners or investors perceive higher risks associated 

with the locale. The insurance premiums in these areas might skyrocket, putting 

additional financial burdens on residents and discouraging new investments. Moreover, 

the interruption to local supply chains can ripple outward, affecting regional and even 

national economies, especially if key industries or transport hubs are disrupted. 

4. Earthquakes. Buildings, bridges, roads, and crucial public utilities like water and 

electricity can be compromised or destroyed. The costs associated with restoring these 

essential amenities can run into billions, pushing national or regional budgets to their 

breaking points. Furthermore, a sudden displacement of populations due to damaged 

homes or unsafe living conditions can lead to immediate resettlement costs, coupled with 

the challenges of providing basic services to the affected populace. 

Price basing/price discovery utility of the Contract: The Contract’s price represents a 

market-based probability that one of these natural disasters will hit a given city. This information 

could be used to help better price a variety of assets, services, commodities, and financial 

contracts, including: 

1. Insurance premiums: insurers could hedge their risk exposure with these event contracts, 

possibly resulting in more competitive premium pricing for consumers. For instance, 

homeowners' insurance in tornado-prone regions or earthquake insurance in seismic 

zones. 

2. Real estate: the value of properties, especially in disaster-prone areas, could be better 

priced if there's a clearer understanding of the financial implications of potential 

disasters. Event contracts could serve as a measure of this risk. 

3. Commodities: the prices of commodities such as agricultural products can be heavily 

impacted by natural disasters. Event contracts can offer farmers and commodities traders 

a tool to hedge against potential losses, leading to more stable pricing. 

4. Infrastructure bonds: bonds issued for infrastructure projects in areas prone to natural 

disasters might offer different yields if the risk associated with potential disasters can be 

hedged or quantified through event contracts. 

5. Utility services: utility companies operating in areas prone to natural disasters might 

adjust their service pricing based on their ability to hedge against disaster-related 

disruptions using event contracts. 

As described in detail above, the Contract has important risk mitigation and price basing/price 

discovery utility. The Contract does not relate to the enumerated categories of contracts listed in 

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Section 5c(c)(i) of the Act. Additionally, the Exchange has not determined such contracts to be 

contrary to the public interest and there has been no determination by the Commission that such 

contracts would be contrary to the public interest. The Contract provides a means for managing 

and assuming price risks, discovering prices, and disseminating price information on the 

Exchange’s fair and financially secure trading facility. 

The Contract has bona fide risk mitigation and price basing utility for participants with 

underlying economic exposure, as described above. The Contract is not merely recreational, as 

the discussion of risk mitigation and price basing/price discovery utility demonstrates. The 

outcome of the Contract is not predominantly determined by chance and depends on a variety of 

meteorological and climate factors. Finally, it is possible for traders to use skill and effort to gain 

knowledge and information about the likelihood of the event. For example, traders can gain 

information about the likelihood of the event by following the baseline rates of given disasters 

for the city in question. 

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APPENDIX C (CONFIDENTIAL) – SOURCE AGENCY 

The data which is used to determine the Expiration Value of the Contract is published by the 

National Weather Service (NWS) and the U.S. Geological Survey (USGS). The methodology 

used by the Source Agencies to collect weather data is robust. For wind speed, the Expiration 

Value will be determined with the NWS’s Daily Climate Report data product, which provides 

detailed city-wise daily weather statistics, including the maximum sustained wind speeds, for a 

large number of American cities and weather stations in a given day. Each day, the NWS releases 

a Daily Climate Report for the previous day containing “detailed daily weather statistics 

including temperature, precipitation, degree days, wind, humidity, sunrise/sunset, and record 

temperature data.” The report can be accessed online via the following link 

(https://w2.weather.gov/climate/), and the link to the data portal will be made available to 

Members via listing on the Exchange website. The specific data value in each day’s Daily 

Climate Report that will be used to determine the Expiration Value of the contract is the 

“Observed Value” for “Maximum Temperature”. The daily wind and rain data collected by the 

National Weather Service is of high integrity. NWS data measurements are subject to multiple 

layers of intense quality control (QC) processes such as “checks of plausibility; checks for 

contradiction; spatial and temporal continuity checks; and the use of diagnostic equations.” 6

Tornado, flash flood, and flood warnings are also published by the National Weather Service. 

Flood warnings are made based on precipitation forecasts, one of the key functions of the NWS’ 

daily climate forecasts. This process is described in detail here and throughout the NWS’ 

website. 7 For tornado warnings, 

When severe weather is either spotted or indicated on radar, the WFO radar operator issues a Severe

Thunderstorm or Tornado Warning via WarnGen [Warning software accompanying AWIPS and used by

local NWS offices to issue warnings and statements of inclement weather.] to alert the public to the

imminent or existing threat of severe weather. As soon as the warning is disseminated, special tones are

broadcast on NOAA Weather Radio in conjunction with the warning message—alerting the public to the

impending threat to life and property. Meanwhile, various television and radio stations occasionally

interrupt regular programming in order to communicate the NWS warning information to a large segment

of the country’s population. During the entire process, it takes a tremendous amount of coordination

between government and private entities to ensure the best possible warning coverage.

8 

8 https://www.weather.gov/pah/1925Tornado_nvt

7 

https://www.weather.gov/about/forecast-process#:~:text=The%20forecast%20process%20is%20roughly,complete%

20picture%20of%20current%20conditions.

6 https://training.weather.gov/nwstc/Hydrology/HYDRO/QCModule/QCConc.HTML#gen

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APPENDIX D (CONFIDENTIAL) – COMPLIANCE WITH CORE PRINCIPLES 

Compliance with Core Principles 

The Exchange has conducted a comprehensive analysis of the designated contract market core 

principles (“Core Principles”) as set forth in Part 38 of the Act. The Core Principles relevant to 

the Contract are outlined and discussed in further detail below: 

Core Principle 2 - Compliance with Rules and Impartial Access: The Exchange has adopted 

the Rulebook, which provides the requirements for accessing and trading on the Exchange. 

Pursuant to Chapter 3 of the Rulebook, Members must utilize the Exchange’s services in a 

responsible manner, comply with the rules of the Rulebook (“Rules”), cooperate with Exchange 

investigations, inquiries, audits, examinations and proceedings, and observe high standards of 

integrity, market conduct, commercial honor, fair dealing, and equitable principles of trade. 

Chapter 3 of the Rulebook also provides clear and transparent access criteria and requirements 

for Exchange Members. Trading the Contract will be subject to all the rules established in the 

Rulebook, which are aimed at enforcing market integrity and customer protection. 

In particular, Chapter 5 of the Rulebook sets forth the Exchange’s Prohibited Transactions and 

Activities and specifically prescribes the methods by which Members trade contracts, including 

the Contract. Pursuant to Rule 3.2, the Exchange has the right to inspect Members and is 

required to provide information concerning its business, as well as contracts executed on the 

Exchange and in related markets. Chapter 9 of the Rulebook sets forth the Exchange’s Discipline 

and Rule Enforcement regime. Pursuant to Rule 9.2, each Member is required to cooperate with 

an Exchange investigation by making their books and records available to the Exchange. The 

Exchange’s Market Regulation Department performs trade practice surveillance, market 

surveillance, and real-time market monitoring to ensure that Members adhere to the Rules of the 

Exchange. The Market Surveillance Department reserves the authority to exercise its 

investigatory and enforcement power where potential rule violations are identified. 

Core Principle 2 also stipulates that an exchange shall establish means to provide market 

participants with impartial access to the market. Chapter 3 of the Rulebook, and Rule 3.1 in 

particular, provides clear and transparent access criteria and requirements for Members. The 

Exchange will apply access criteria in an impartial manner, including through the application 

process described in Rule 3.1. 

Core Principle 3 - Contract not Readily Subject to Manipulation: 

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Core Principle 3 and Rule 38.200 provide that a DCM shall not list for trading contracts that are 

readily susceptible to manipulation. The Exchange’s marketplace and contracts, including this 

Contract, have been designed in accordance with this fundamental principle. The Exchange 

maintains various safeguards against outcome manipulation and other forms of manipulation, 

including, (i) automatic trade surveillance and suspicious behavior detection, (ii) Rulebook 

prohibition, Member certification, and notification, (iii) Member monitoring and 

know-your-customer verification, and (iv) sanctions. These safeguards render the Contract not 

readily susceptible to manipulation. 

(i) Automatic trade surveillance and suspicious behavior detection : The Exchange’s trade 

monitoring and market surveillance systems compute statistics using information from all trades 

that occur on the Exchange over a range of timeframes, ranging from per trade to the full history 

of trading activity. These statistics are geared towards identifying unusual trading activity and 

outlier behaviors. If the trade monitoring and market surveillance system identifies behavior 

deemed to be unusual, the Exchange’s compliance personnel have the ability to investigate and 

determine applicable sanctions, including limits to or suspension of a Member’s access to the 

Exchange. 

(ii) Rulebook prohibition, member certification and notification: The Exchange’s Rulebook 

includes various provisions that prohibit manipulative behaviors. As noted above in the 

discussion of Core Principle 2, the Exchange’s Rulebook gives the Exchange the authority to 

investigate potential violations of its rules. Pursuant to Rule 3.2, the Exchange has the right to 

inspect Members’ books and records, as well as contracts executed on the Exchange and in 

related markets. Pursuant to Rule 9.2, each member is required to cooperate with an Exchange 

investigation by making their books and records available to the Exchange for investigation. The 

Exchange’s Market Regulation Department performs trade practice surveillance, market 

surveillance, and real-time market monitoring to ensure that Members adhere to the Exchange’s 

rules. The Rulebook also imposes sanctions on Members who break rules. Potential penalties 

include fines, disgorgement, and revocation of membership in Kalshi. Only Members are 

allowed to trade on the Exchange, and the Exchange requires its Members to strictly comply with 

the Rulebook. Members cannot complete the account creation process and trade on the Exchange 

until they certify that they have read the Exchange’s rules and agree to be bound by them. 

In addition, the Exchange requires applicants for membership to represent and covenant that the 

applicant will not trade on any contract where they have access to material non-public 

information, may exert influence on the market outcome, or are an employee or affiliate of the 

Source Agency. In order to further reduce the potential for manipulation, the Exchange maintains 

a dedicated page on the trading portal that lists all the source agencies and their associated 

contracts, together with a warning that employees of those companies, persons with access to 

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material non-public information, and persons with an ability to exert influence on the underlying 

of a contract are prohibited from trading on those contracts. This page is intended to serve as an 

effective means of raising Members’ awareness of these rules and prohibitions, further reducing 

the potential for manipulation. Similarly, the Exchange places a prominent notice on each 

contract page that notifies Members of the prohibition on trading the Contract while employed 

by its Source Agency, trading the Contract on the basis of non-public information, and trading 

the Contract while having the ability to exert influence on the Contract’s Market Outcome. 

(iii) Member monitoring and know-your-customer verification (“KYC”) : The Exchange has 

a robust KYC process. The KYC process is an important tool that helps flag and uncover higher 

risk traders before they become Members of the platform. The Exchange’s KYC process 

leverages technology to develop a clear and proper understanding of its members, and the 

various risks they may pose with respect to market integrity and fairness, including 

manipulation. During the application process, applicants are required to share personally 

identifiable information, such as their full legal name, identification number, date of birth, and 

address with the Exchange. Additionally, applicants are required to provide a government issued 

photo ID (passport, drivers license, etc.) that is used to validate the personally identifiable 

information shared by the applicant during the application process. Applicant information is run 

through a comprehensive set of databases that are actively compiled and maintained by an 

independent third party. The databases are utilized by the Exchange to identify applicants that 

are employees or affiliates of various governments and other agencies. Moreover, the databases 

can identify known close relatives and associates of such people as well. Applicants that are 

flagged go through enhanced due diligence, including manual review, as part of the onboarding 

process. 

Additionally, as part of the KYC process, the Exchange runs applicants through adverse media 

databases. The adverse media dataset is a real-time structured data feed of companies and 

individuals subject to adverse media. Monitoring thousands of news sources, business and trade 

journals, in addition to local, regional and national newspapers, the adverse media feed isolates 

and highlights any entities or individuals subject to a range of adverse media. The Exchange 

utilizes the database to trigger enhanced due diligence, because applicants with adverse media 

may be more likely to engage in certain types of unlawful activity including market 

manipulation. 

The Exchange engages in active and continuing KYC checks. The KYC checks are initially 

performed upon application, and the Exchange then monitors its Members on an ongoing basis 

by running member information through the KYC databases. If material new information 

concerning an existing Member is at some point added to a database, the Exchange’s system will 

flag the Member even if the cause for the flag was not extant at the time of the Member’s 

application. That Member will then go through enhanced due diligence. 

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(iv) Sanctions : Exchange Members must agree to the terms and conditions of the Exchange’s 

Rulebook before being allowed to trade. As a result, Members are subject to disciplinary actions 

and fines for engaging in improper market conduct that is prohibited by the Exchange’s 

Rulebook. In the event that suspicious trading activity is detected and results in an investigation 

initiated by the Exchange, market participants are required to provide the Exchange with 

information relevant to the scope of the investigation under Rule 3.2. Chapter 9 of the 

Exchange’s Rulebook details the process for discipline and rule enforcement. Disciplinary action 

can range from a letter of warning to fines to referral to governmental authorities that can result 

in criminal prosecution. 

In addition to these global policies and safeguards, there are a number of contract specific 

attributes and considerations that render the Contract not readily susceptible to manipulation. 

Regarding possible outcome manipulation by the Source Agencies, the National Weather Service 

(NWS) and the United States Geological Survey (USGS) are highly reputable government 

agencies with multiple levels of security and safeguards that protect the integrity of its data. 

Employees of these organizations would face professional and legal consequences if they 

attempted to intentionally manipulate daily temperature data in order to influence the outcome of 

the contract. Additionally, as stated above in “Price Reporting Agency”, the wind speed and rain 

data collected by the NWS is of high integrity because NWS data measurements are subject to 

multiple layers of intense quality control processes such as checks of plausibility, checks for 

contradiction, spatial and temporal continuity checks, and verification with diagnostic equations. 

Thus, it is unlikely that a coordinated effort to manipulate wind speed or precipitation readings 

would be successful. The USGS is also in practice unable to publish false information without 

major public repercussions. Earthquakes of a large magnitude, as this contract will cover, are 

major, disruptive events. Their location and magnitude are readily verifiable by amateurs and 

other organizations. 

With regards to use of non-public information or manipulation by individual employees, NWS 

and USGS employees are prohibited by Kalshi from trading on the contract. Moreover, data 

collected by NWS/USGS concerning precipitation, earthquake impact, or wind speed is quickly 

released to the public in the form of public advisories. As such, non-public information quickly 

becomes public, mitigating the advantage held by the relevant government employees. This is 

particularly true given that other weather stations, such as weather.com and accuweather.com, 

also release data around wind-speeds, earthquake impact, and precipitation, mitigating the 

importance of NWS and USGS data. 

Core Principle 4 - Prevention of Market Disruption: Trading in the Contracts will be subject 

to the Rules of the Exchange, which include prohibitions on manipulation, price distortion, and 

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disruption to the cash settlement process. Trading activity in the Contract will be subject to 

monitoring and surveillance by the Exchange’s Market Surveillance Department. In particular, 

the Exchange’s trade surveillance system monitors the trading on the Exchange to detect and 

prevent activities that threaten market integrity and market fairness including manipulation, price 

distortion, and disruptions of the settlement process. The Exchange also performs real-time 

market surveillance. The Exchange sets position limits, maintains both a trade practice and 

market surveillance program to monitor for market abuses, including manipulation, and has 

disciplinary procedures for violations of the Rulebook. 

Core Principles 7 and 8 - Availability of General Information and Daily Publication of 

Trading Information: Core Principles 7 and 8, implemented by Regulations Sections 

Subsections 38.400, 38.401, 38.450, and 38.451, require a DCM to make available to the public 

accurate information regarding the contract terms and conditions, daily information on contracts 

such as settlement price, volume, open interest, and opening and closing ranges, the rules, 

regulations, and mechanisms for executing transactions on or through the facilities of the 

contract market, and the rules and specifications describing the operation of the contract market's 

electronic matching platform. 

Rule 2.17 of the Rulebook sets forth the rules for publicizing information. The Rulebook and the 

specifications of each contract are made public on the Exchange website and remain accessible 

via the platform. The Exchange will post non-confidential materials associated with regulatory 

filings, including the Rulebook, at the time the Exchange submits such filings to the 

Commission. Consistent with Rule 2.17 of the Rulebook, the Exchange website will publish 

contract specifications, terms, and conditions, as well as daily trading volume and open interest 

for the Contract. Each contract has a dedicated “Market Page” on the Kalshi Exchange platform, 

which will contain the information described above as well as a link to the Underlying used to 

determine the Expiration Value of the Contract. Chapter 5 sets forth the rules, regulations and 

mechanisms for executing transactions, and the rules and specifications for Kalshi’s trading 

systems. 

Core Principle 11 - Financial Integrity of Transactions: Each Member must be in good 

standing and in compliance with the Member eligibility standards set forth in Chapter 3 of the 

Rulebook. All contracts offered by the Exchange, including the Contract, are cleared through the 

Clearinghouse, a Derivatives Clearing Organization (“DCO”) registered with the CFTC and 

subject to all CFTC Regulations related thereto. The Exchange requires that all trading be fully 

cash collateralized. As a result, no margin or leverage is permitted, and accounts must be 

pre-funded. The protection of customer funds is monitored by the Exchange and ensured by the 

Clearinghouse as “Member Property.” 

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All Remaining Requirements: All remaining Core Principles are satisfied through operation of 

the Exchange’s Rules, processes, and policies applicable to the other contracts traded thereon. 

Nothing in this contract requires any change from current rules, policies, or operational 

processes. 

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