Other than the ISDA (which is an association of operators who do not trade on regulated derivative exchanges), HedgeStreet (a non-intermediated DCM) was the first representative of the regulated derivative exchange community to submit a comment to the CFTC. — (PDF file)

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HedgeStreet are saying that:

1. The political elections qualify as “excluded commodities” (as opposed to “exempted commodities”). The reason for that is that electing a Republican president can have some economic consequences for some industries (e.g., the oil industry, the health services industry, etc.), while electing a Democratic president can have opposite economic consequences, or economic consequences for other industries. Hence, the risk, and thus, the need for hedging those risks. And, so, the role of the CFTC is to guard against manipulations, etc.
2. If the political elections qualify as “excluded commodities”, then, logically, the prediction markets on political elections should be offered by Designated Contact Makers (DCMs), like HedgeStreet —and not by ECMs or by event derivative exchanges crowned with a “no-action” letter by the CFTC.

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Besides the point #2 made by Vernon Smith in his comment back in May 2008, that is the strongest point made to the CFTC —as of today, Sunday, July 6th, 2008. (Jason Ruspini bought it, too.) I can’t imagine that the CFTC will ignore this point.

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However, HedgeStreet are not saying that:

1. The topics other than political elections are “excluded commodities”, too.
2. They are “exempt commodities”.
3. They should be offered by DCMs.
4. They should be offered by ECMs or by event derivative exchanges crowned with a “no-action” letter by the CFTC.

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They just say nothing.

See, HedgeStreet make a point that the CFTC should allow them to offer prediction markets on political elections to retail traders, but do not discuss the status of all the other prediction markets —and you’ve have seen that, in their concept release, the CFTC have mentioned many examples other than political elections.

What I’m trying to do this Sunday is to analyze their silence. Would that mean that HedgeStreet wouldn’t mind a dual decision by the CFTC —as long the first part of this dual decision consists in granting (maybe, non exclusively) to the DCMs the right to offer prediction markets on political elections?

In other words, if the CFTC makes HedgeStreet happy, can they, also, satisfy (even partially) the other people? (Some people are petitioning for the right to offer all kinds of prediction markets, but they would like to do that thru a ECM or a “no-action” letter.)

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UPDATE: See also the CME Group’s comment to the CFTC. – (PDF file)

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