Event contract
A derivative contract whose payoff depends on a specified event, occurrence or value, for example whether it rains tomorrow or what an economic indicator will be. It is the product traded on prediction markets.
In practice
Many event contracts allow only two outcomes, "yes" or "no", with a fixed payout and an expiry. A trader who buys the "yes" side for 70 cents on a $1 contract makes 30 cents if the event happens and loses the 70 cents if it does not. CFTC Regulation 40.11 prohibits event contracts that reference terrorism, assassination, war, gaming or an activity that is unlawful under state or federal law.
How are event contracts built?
The CFTC says they are typically structured as swaps: financial contracts whose value comes from an underlying commodity, here the outcome of an event. Besides the yes-or-no form, some contracts combine several yes-or-no questions, offer a set of multiple-choice answers or use ranges of outcomes with partial payouts.
Source: US Commodity Futures Trading Commission — Prediction Markets
What are event contracts used for?
For hedging and for speculation. The CFTC's example of hedging is a citrus farmer who buys a weather contract to offset the losses a sudden freeze would cause.
Source: US Commodity Futures Trading Commission — Prediction Markets
How does a new event contract reach the market?
A designated contract market may list a new contract by filing a self-certification with the CFTC that the contract complies with the Commodity Exchange Act and the Commission's regulations, or it may ask the Commission to approve the contract.
Source: US Commodity Futures Trading Commission — Contracts & Products, Event Contracts
Has the CFTC blocked event contracts?
Yes. On 2 April 2012 it issued an order prohibiting political event contracts at the North American Derivatives Exchange. The contracts would have paid out on the outcome of US federal elections; the CFTC determined that they involved gaming and were contrary to the public interest.
Source: US Commodity Futures Trading Commission — Contracts & Products, Event Contracts
Checked against the official sources on .