07/07/2008 00:28 2122133075 . 

Received CFTC 

~oJ~ Sectlon 

7lfO/tP r 

Commodities Future Trading Commission 

Three Lafayette Center 

1155 21 ;t Street, NW 

Washington, DC 20581 

EIJRASIA_GPOUP 

JUL -8 AH If: 25 

DFC. OF THE SECRETt~RiAT. 

Eurasia Group comment to the CFTC regarding: 

Concept Release on the Appropriate Regulatory Treatment of Event Contracfs 

Federal Register Release: 73 FR 25669 

May 7, 2008 (Volume 73, Number 89) 

Pages 25669-25674 

To whom it may eoncem, 

PACiE 02/04 

7 July 2008 

COMMENT 

Eurasia Group is a global leader in political risk analysis. We have many financial, 

C011Jorate, and government clients across the US, Europe and the developing world. At 

these organizations, we support the work of analysts, traders, portfolio managers, project 

leaders, risk officers, and corporate executives. They employ us both on a retainer basis 

and for custom project work to explain and forecast political, social, and security 

developments around the world. 

Our financial clients (including, but not limited to, US and UK-based global macro and 

multi-strategy hedge funds, emerging markets investors, commodities funds, investment 

banks and private equity funds) are active in global equity, debt, currency, and 

commodity markets, and also make critical use of derivatives. Our corporate clients 

(including, but not limited to, multi-national cornpanies concentrating in the extractive, 

automotive, rctai.l and consumer product industries) invest and operate around the world, 

in both developed and developing nations. All these clients face a wide range of real 

world circumstances. They are fami.liar with a range of risks, including operational risk, 

market risk, credit risk, and counterpa1iy risk. They come to us for a better understanding 

of political risk; these may be local (labor strikes and social unrest), national (an 

unfriendly government or harmful regulatory changes), regional (military conflict or 

public health crise~) or international (teJTorism, treaty arrangements or sanctions). Any of 

these risks can materialize to do real harm to investors and companies. 

For those concerned with political risks, there arc two main challenges: assessing the 

likelihood of a risk materializing and developing mitigation strategies. For otl1er types of 

risk, investors and operators have sophisticated assessment technique~, including valueat-risk models, detailed .financial statement analysis, and the hard-eamed experience of 

senior managers. And for other types of risk, there are a range ofrisk management tools, 

including internal controls, fin<Jncial hedging, and insurance. But the assessment and 

mitigation strategies available for po.litical risk are relati,•ely paltry. 

Political risk analysis properly done is a rigorous process that provides valuable 

predictive insight. And yet political risks remain among the most badly measured of all 
87/87/2088 88:28 2122133875 EIJRASIA_6ROIJP 

risks. In part this is because analysts bring a wide range of biases to political risk work. 

Ideology, hope, and fear are manifest in much political risk analysis. J.n addition, a 

thorough analysis of political risks often requires an understand.ing of a wide range of 

facts, and skills in a wide range of disciplines. Few people or organizations can bring all 

these resources together to perform a comprehensive assessment. 

PN3E 03/04 

Even when political risks are properly measured, there remains the problem. of mitigation. 

For market participants, polit1cal developments can mean financial losses even when the 

investor has gotten the economics of the investment right. A11d for corporations, politics 

can do serious damage to company operations, even when the business model is 

othenvise solid. But investors who know markets and businessmen who knov.r commerce 

bave a very hard time coping with this sort of problem. Many times, the only apparent 

way to avoid the political risk is to forego the opportunity. But an investment not-made or 

a factory not-built represents a real loss -both to the investor and to the people who 

would bave benefitted from the commitment of resources. Those wanting to hedge 

political risk can, in some circumstances, purchase over-the-counter insurance against a 

particular event. But these private contracts arc done on a one-off basis, do not have very 

competitive or rigorous pricing, and ar:e illiquid. For example, if the relevant risk 

becomes evidently less after such an insurance contract is bought, the buyer's only 

recourse may be to sell the contract back to the insurer, almost certainly at a tenible price. 

This dynamic discourages the use of political risk insurance products. 

Active and public event markets could be very useful for addressing the challenges of 

political risk assessment and mitigation. Our clients, who may become very active in 

event markets, are not interested in creating artiflcial zero-sum contracts to engage in 

risk-taking that is distinct from their primary investment goals. Instead, they are 

interested in event contracts for risk assessment and mitigation. 

Regarding assessment, the price discovery function ofmarkets would be invaluable to 

aggregating the collective knowledge and judgment of investors, companies and 

observers on questions of political risk. As demonstrated by the history oflimited event 

markets like IEM and Intrade, the implied forecasts generated by event market trading are 

among the most accurate public predictions of political developments available anywhere. 

The information conveyed by event market pricing is useful even to those who do not 

trade in these markets, and provides a valuable input to financial, corporate, and 

government decision-making. 

An event m<Jrkct could also function as a. valuable mitigation tool. As with all derivative 

markets, an event market is fundamentally a mechanism .for reallocating risk. Investors 

~d companies who want to hedge against a particular political development could do so 

m an event market, \:Vith a tradable contract designed specifically around the particular 

event. And as the level of risk associated with a specific political development changes 

over time (and the contract prices changes accordingly) market participants will be able 

to adjust their positions to maintain the desired level of risk protection. On the other side 

of the hed~in_g trade will be market participants (including perhaps some insurers) who 

have the Yvtllmgness and resources to take on the additional risk. 
07/07/2008 00:28 2122133075 EURAS I f.u:>ROUP 

The net result will be to provide more accurate public assessments of political risks 

around the world, and a mitigation tool for investors and companies who want to operate 

in politically risky environments in a prudential manner. This is an unmitigated public 

good. 

Sincerely, 

-::fJ--------

Ian Bremmer 

President esearch Director 

PAGE 04/04 

Chief 

Alec 

~~ Alenstein 

Operating Of±'icer 

~~ 

~A-~ 

Kevin Kajiwara 

Global Markets Director 

Preston Keat 

Research Director