Investors blocked from betting on US congressional elections by regulator

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The main US derivatives regulator has thrown out contracts that would have allowed investors to place bets on congressional elections, as preparations for races in 2024 are kicking into high gear.

The Commodity Futures Trading Commission on Friday said Kalshi, a retail-focused futures market, was barred from offering contracts that constitute bets on which political parties would be in control of different chambers of the US Congress. 

“After reviewing the complete record, the CFTC determined the contracts involve gaming and activity that is unlawful under state law and are contrary to the public interest,” the regulator said in a statement on Friday. 

The contracts would have been binary, cash-settled and based on the question: “Will <chamber of Congress> be controlled by <party> for <term>?”  

Kalshi, based in San Francisco, offers dozens of contracts that enable customers to bet on events or data, such as the length of the current United Auto Workers’ strike and the average price of petrol.

Tarek Mansour, chief executive of Kalshi, said the group disagreed with the CFTC decision. “However, we remain optimistic and believe that with time, our vision will be recognised and embraced,” he added.

Critics had raised concerns that contracts representing bets on the outcome of elections might have blurred the lines between gambling and trading and risked undermining US democracy.

The CFTC in 2012 rejected an earlier proposal for “political event” futures offered by the Nadex exchange, also saying they were against the public interest.

Tyler Gellasch, president of the Healthy Markets Association, did not find the CFTC’s decision surprising. “But the questions now are whether the decision will be challenged in court, and if the court will agree with the agency’s logic,” he said. “The courts have been increasingly willing to second-guess financial regulators’ analyses for even decisions that were historically routine and obvious, like this one.”

At the moment, investments based on the likely economic impact of electoral outcomes can be completed by buying or selling currencies, stocks or bonds likely to be affected by political events. Banks may also offer derivatives focused on politics, but these types of contracts remain unregulated and are traded bilaterally. 

Kalshi’s request would have brought its contracts into the regulated sphere, potentially ushering in a string of other exchanges keen to seek approval to offer similar instruments based on the outcome of political elections. 

If Kalshi had secured the CFTC’s sign-off, its contracts would have paid out if an investor had chosen the correct political party taking over the US House of Representatives or the Senate. An incorrect guess would have led to the loss of the original investment.  

The CFTC’s decision comes as the US gears up for a fraught election in 2024, with both houses of Congress up for grabs and President Joe Biden planning to run for a second term.