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The American Civics Exchange is the first US-based commercial market for political futures. We enable businesses and investors to reliably hedge financial exposure to changes in public policy.

ACE facilitates hedging of political risk through binary futures contracts tied to the outcomes of underlying events , including:

  • Changes in tax policy
  • Enactment of proposed legislation
  • Issuance of regulatory decisions
  • Outcomes of major litigation

The use of futures contracts to hedge exposure to commodity prices dates back more than 2,500 years . More recent innovations have enabled efficient hedging of a wide array of risk factors, including foreign exchange rates, interest rates, and even weather.

ACE offers a similar risk management solution for political events.


Contract Structure

  • Binary futures (all-or-nothing payouts)
  • $10,000 notional value per lot
  • Payout of notional value occurs at expiration date (or earlier) if/when criteria are met

To offset a hypothetical $100,000 negative exposure to a proposed increase in the capital gains tax rate, a market participant would place a bid on 10 contracts. If that order were filled at $3,000, the position would cost $30,000 (excluding transaction costs). Matching such a bid does not require a coincident order to sell 10 contracts. As with established exchanges, the liquidity of a robust marketplace of buyers and sellers will enable even large orders to be automatically matched to batched bids submitted by an unlimited number of participants, including both speculators and natural hedgers. If the tax increase is enacted before 12/31/12, the contract holder would receive $100,000, offsetting the impact of the tax increase. The contract holder can also sell the contract back into the marketplace at the prevailing price at any time before the expiration date, provided another party is willing to purchase the contracts at that price.

SHORTING

If a market participant who does not already hold a “long” position in the contract wanted to short the contract (whether as a speculator who believes the current price is too high or because of an inverse exposure to the underlying event), he or she can still “sell” the contract. In the above example, this transaction would incur a cost of $7,100 ($10,000 minus the bid price of $2,900) per $10,000 contract. This contract would pay out upon expiration if the triggering condition is not met.

CLEARING

All contracts will be cleared by a regulated clearinghouse (under the jurisdiction of the Commodity Futures Trading Commission), which serves as central counterparty to each trade.


Contracts To Be Traded

Traded products will involve underlying political events that can be standardized into discrete contracts and pose significant financial exposure to risk and investment managers.

Our initial “real money” contract selection will reflect their breadth of impact and likelihood of passage, based on the current political landscape. The table to the right offers a sample of the policy events that may underly contracts traded on the exchange.

We will also list an expanded catalog of contracts on the “play money” market; these and other contracts will migrate to live trading as market liquidity and political developments warrant.


Regulatory Status

The Exchange filed a notification letter with the Commodity Futures Trading Commission (CFTC) in 2009, electing to operate as an EBOT, under the guidelines set forth in the Commodity Exchange Act (CEA) and the Commodity Futures Modernization Act. The Exchange is not a Designated Contract Market (DCM) or any other CFTC-regulated entity. As such, the Exchange is not designated or licensed by the CFTC.

We intend to list our contracts on a CFTC-regulated DCM in the coming months. In addition to the transparency and regulatory oversight associated with trading on a regulated exchange, all trades will be cleared by a regulated Derivatives Clearing Organization (DCO), helping to minimize counterparty risk. Before real-money exchange trading begins, some or all of our products may be subject to Part 40.11 review by the CFTC.