FA 

3 December 2008 

Centre for 

Financial 

Market 

Integrity 

Office of the Secretariat 

Commodity Futures Trading Commission 

Three Lafayette Centre 

1155 21st Street, NW 

Washington, DC 20581 

RECEIVED _,-, r~ --:- (' : . ' ' , ~ - .. _ _... ~ 

JFC. OF THE SECRETARIAT 

COMMENT 

Re: Concept Release on the Appropriate Regulatory Treatment of Event Contracts 

Dear CFTC Secretariat: 

The CFA Institute Centre for Financial Market Integrity (the "CFA Institute Centre")' appreciates the 

opportunity to respond to the Commodity Futures Trading Commission (the "CFTC" or the 

"Commission") concerning its Concept Release on the Appropriate Regulatory Treatment of Event 

Contracts (the "Concept Release"). 

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As part of its review, the CFA Institute Centre consulted with its Capital Markets Policy Council, a 

volunteer committee of 11 investment professionals operating in eight major financial markets around the 

world, and its Advisory Council, a volunteer committee of seasoned investment professionals from 

around the globe. The CF A Institute Centre represents the views of investment professionals before 

standard setters, regulatory authorities, and legislative bodies worldwide on issues that affect the practice 

of financial analysis and investment management, education and licensing requirements for investment 

professionals, and the efficiency and integrity of global financial markets. 

Summary Position 

We believe that the use of events contracts may serve legitimate purposes in portfolio management and 

their continued use should be allowed. However, our concern about the appropriateness for retail 

investors and the uncertainty of defining what would constitute "legitimate" event contracts argue for a 

limited regulatory approach. In addition, the current market volatility argues against adding new 

instruments that might add volatility to the marketplace at this time. We therefore strongly recommend 

that event contracts be restricted to off-exchange venues and that the CFTC not undertake action that 

would allow or recognize events contracts on Commission-regulated markets. The reasons for this 

position are discussed more fully below. 

1 The CFA Institute Centre for Financial Market Integrity is a part of CFA Institute. With headquarters in Charlottesville, Virginia, USA, and 

regional oftices in London, Hong Kong, and New York, CFA Institute is a global, not-for-profit professional association of more than 99,700 

financial analysts, portfolio managers, and other investment professionals in 133 countries and territories, of whom 86,300 hold the Chartered 

Financial Analyst® (CFA®) designation. The CFA Institute membership also includes 136 member societies in 57 countries and territories. 

434 951 5499 ',, 

434 951 5262 

j! 

560 Ray C. Hunt Drive 

PO Box 3668 

Charlottesville, VA 

22903-0668 USA 

i nfo@cfainstitute.org 

www.cfainstitute.org 
Discussion 

Centre for 

Financial 

Market 

Integrity 

In its Concept Release, the CFTC asks for input on the appropriate regulatory treatment of event 

contracts, citing a desire for regulatory certainty and to act in the public's interest. It also raises certain 

practical issues relating to the ability to define event contracts that may serve as useful information 

aggregation vehicles from those that are the functional equivalent of gambling. The CFTC also asks 

whether its lack of ability to effectively monitor the events underlying the contracts should be a factor in 

determining whether to allow these contracts to be traded on Commission-regulated markets, and in 

particular to retail investors. 

We acknowledge that certain types of events contracts may provide benefits to portfolio management. 

They provide different sources of market information, including price discovery. They also allow for 

innovative hedging strategies, even for long-term investors. As the CFTC recognizes, a number of offexchange venues already exist in which these types of contracts are traded. We support continued use of 

these venues for the trading in these contracts. 

We do not, however, support action by the CFTC to formally recognize or otherwise endorse the trading 

of events contracts in venues regulated by the CFTC. 

First, as recognized by the CFTC in its release, certain event contracts appear to be little more than 

functional gambling. Regulatory efforts to provide legitimacy to this area by allowing their trading on 

regulated exchanges would appear to condone practices that in some cases are arguably not appropriate 

for regulated trading markets. It would also convey the wrong message to the retail investor community 

about whether trading in these contracts is an appropriate and recognized investment strategy. 

Second, while we recognize that certain types of contracts may be appropriate for portfolio management 

purposes, the CFTC recognizes there is no clear line yet between legitimate financial tools and what 

essentially constitutes gambling. Regulatory recognition of these contracts would then carry the 

concomitant responsibility of defining, monitoring, and enforcing practices associated with whatever 

ultimately are determined to be "legitimate" types of contracts. On a very practical and real basis, the 

amount of resources that would need to be diverted to this area, should this practice become mainstream, 

raises a number of questions about the best use of regulatory resources. 

Finally, given the existence of private venues for the trading of these contracts, we see no compelling 

reason for expanding their use into Commission-regulated markets. While the Concept Release does 

raise a number of issues that highlight concerns about this area, we do not read any discussion of what 

substantial benefits are to be derived by bringing events contracts squarely under CFTC jurisdiction. 

Instead, we believe that the public interest is best served by allowing event markets to continue but only 

on off-exchange venues. 

Survey Results 

As part of its efforts to respond to the Concept Release, the Centre recently surveyed the membership of 

CFA Institute. Of the nearly 1,100 respondents to this survey, 712, or 65%, indicated that they believe 

event contracts provide valuable information that can improve the decisions of investors, commodity 

producers, manufacturers, and others. On the other hand, the respondents were more ambivalent about 

both the usefulness or appropriateness of these contracts for investment purposes and the need for 

regulators to assume direct oversight of these contracts and markets. 

2 
Centre for 

Financial 

Market 

Integrity 

For example, in response to a question about usefulness, just 52% of respondents agreed with the 

suggestion that event contracts "can help investors, commodity producers, manufacturers, and others 

hedge specific risks." This includes 40% who agreed only that these contracts were useful for hedging 

purposes, and 12% who said there were useful for hedging and "suitable for customer investment 

accounts." Only 2% said they were suitable for customer investment accounts, but not for hedging. 

Likewise, only 52% of respondents believe derivatives markets regulators should have direct oversight of 

event contracts. Of these, 29% said direct oversight should come with permitting these contracts to trade 

on established futures and options exchanges, while the remaining 23% said this direct oversight should 

include a restriction on these contracts to trading only on specialty prediction markets. By comparison, 

9% said regulators should have responsibility only to review and approve specialty prediction markets, 

and 18% said they should have no authority over prediction markets or event contracts at a11.2 

Conclusion 

The CFA Institute Centre reiterates its view that event contracts may be valuable to investors by 

conveying information about a variety of matters that may affect their investment decisions. By trading as 

part of a specialty market, moreover, these contracts have the potential to more accurately express 

prevailing sentiments than other sources, such as polls or other forms of market surveys. As noted above, 

we support continued use of these contracts, but not on Commission-regulated exchanges. 

As evidenced in our survey, CFA Institute members believe that derivatives markets regulators should 

devote only limited resources and oversight to event contracts and prediction markets activities. Indeed, 

less-sophisticated investors might see a significant CFTC effort in these markets as a sign of safety that 

our members do not believe is warranted yet. 

The CFA Institute Centre appreciates this opportunity to comment on the CFTC's Concept Release on the 

Appropriate Regulatory Treatment of Event Contracts. If you have any questions about our responses and 

suggestions, please feel free to contact either Kurt Schacht, CFA, at+ 1.212.756.7728 or 

kurt.schacht@cfainstitute.org, or James C. Allen, CFA, at +1.434.951.5558 or 

james.allen @cfainstitute.org. 

Sincerely, 

Kurt Schacht, CFA 

Managing Director 

CFA Institute Centre for Financial Market Integrity 

2 The remaining 20% had no opinion. 

3 

/ 

James C. Allen, CFA 

Director, Capital Markets Policy Group 

CFA Institute Centre for Financial Market 

Integrity