Sleeper Markets, LLC (“Sleeper Markets”) is offering Event Contracts (“Contracts”), which are swaps regulated by the Commodity Futures Trading Commission (“CFTC”) under the Commodity Exchange Act (“CEA”), to its clients as a member of KalshiEX LLC and Kalshi Klear LLC. KalshiEX is registered with the CFTC as a designated contract market (“DCM”) and Kalshi Klear is registered with the CFTC as a derivatives clearing organization (“DCO” or “Clearinghouse”).
In compliance with CFTC Regulation 22.16, we are advising you that in the unlikely event of Sleeper Markets’ insolvency, customer rights would be determined pursuant to the commodity broker liquidation provisions of the U.S. Bankruptcy Code and CFTC Part 190. However, if the DCO or the insolvency proceeding is outside the U.S., local insolvency law could affect a customer’s ability to recover funds and securities or the speed of any such recovery. DCOs have rules that govern the use of cleared swaps customer collateral, and/or the transfer, neutralization of risks, and liquidation of cleared swaps in the event of a default relating to a cleared swap customer account. For further details, see KalshiEX’s Risk Disclosure (Section III).
Description of Event Contracts
Event Contracts are a type of derivative that the CFTC classifies as “Cleared Swaps,” and are often referred to as forecast or prediction contracts. The value of a Contract is based on whether a specific event will occur at or before a specific time. The Contracts are described by a “Yes” or “No” proposition. The “Yes” Contract and “No” Contract are two separate Event Contracts each with a unique contract ID. Market participants place Bids on either the “Yes” or “No” Contract at prices between $0.01 and $0.99.
Once the execution has been reported to the Clearinghouse, each market participant will have entered into a Contract on the DCM, and the Clearinghouse has the obligation to pay any monies required at such time as the Contract settles.
All Event Contracts must be fully collateralized, meaning a Futures Clearing Merchant (“FCM”) who is a member of the DCM will reject any Bid placed by a customer unless funds sufficient to fully collateralize the Bid are deposited in an account with the FCM prior to the customer placing the Bid.
Once an Event Contract expires, it will no longer be available. Subsequently, the resolution of the Contract will be determined based on the occurrence or nonoccurrence of the reference event, and the Contract will go through Settlement. Depending on the outcome of the event underlying the Contract, the holder of the “Yes” Contract that reflects the outcome of the event may be entitled to receive the Settlement Value of $1.00, while the opposing “Yes” Contract may expire with no value, or vice versa.
Event Contracts cannot be sold or transferred to another DCM. Contracts can only be exited before resolution by acquiring an offsetting position, which is achieved by holding both a “Yes” and a “No” Contract with respect to the same underlying event.
Event Contracts are a type of derivative, in that they derive their value from an underlying asset. However, Event Contracts have a number of important distinctions from other derivative products. Unlike futures and options, Event Contracts are fully-collateralized and cannot be purchased on margin. This means that a market participant must post the full amount of funds required to secure the Contract prior to being permitted to do so. Additionally, Event Contracts are not marked-to-market. As a result, market participant will never require the deposit of additional funds to maintain an existing position in one or more Contracts. These Contracts are further differentiated from other derivatives in that they are not restricted to using a physical commodity or tradable financial instrument as their underlying asset and are always settled by cash settlement. Finally, the value of a futures or in-the-money options contract at expiration will vary depending on the price of the underlying asset, whereas Contracts will either have a Settlement value of $1.00 or $0.
Event Contract Risks
Market Risk
The outcome of an Event Contract cannot be known in advance. Market participants’ expectations may not match the outcome of the Event, which can lead to unexpected losses. Market participants should be prepared to potentially lose the entirety of their collateral. Changes in the likelihood of an underlying event may not necessarily result in a change in the price of the related Contract, which could prevent a customer from offsetting an existing position at a profit.
Pricing Risk
The prices of Event Contracts are dependent on the market’s sentiment regarding the probability of events occurring, which makes traditional derivative pricing models inapplicable for forecast or prediction event contracts. Event Contract prices may not always be reflective of the actual probabilities of the Events occurring, which can lead to unexpected losses for market participants.
Source Agency Risk
The value of an Event Contract is dependent upon the outcome of events which are reported by third party Source Agencies. Market participants may be exposed to risk if data security is compromised, if the reported data is not accurate or is incomplete, or if the data is not reported at the expected date or time.
Liquidation Risk
Market participants may not be able to offset their positions if there is insufficient volume in the opposing Event Contract. Market participants may also struggle to offset their positions if the opposing contract has insufficient Bid depth. These could result in a mismatch between the pricing of Contracts with the market’s prediction of the underlying event, and market participants would be forced to pay higher prices to offset their positions.
Trading Halt Risk
DCMs have the authority to initiate trading halts if they deem it in the interest of market participants, which would prevent market participants from exiting their positions, and could affect their portfolios and strategies. The CFTC can also direct the DCM to initiate a trading halt.
FCM Risk
Market participants will be exposed to risks associated with the FCM including: the failure of the FCM’s hardware and software, bankruptcy of the FCM, and the FCM failing to provide the Clearinghouse with adequate funds to guarantee their customers’ Bids. These risks may result in Bids (including offsetting Bids) not being executed according to the market participant’s instructions or not being accepted. Market participants should consult their FCM concerning the nature of the protections in place to minimize these risks.
Other Risks
There are unforeseen operational risks associated with human error, systems failures, cyberattack, or inadequate procedures and controls that may pose a risk to the success of market participants’ bids. Because Sleeper Markets is a fully electronic platform, the software system could be subjected to temporary interruptions or failure. If any of the events listed above occurred, it could lead to potential losses for the customer.
The risk of loss in trading event contracts can be substantial. You should, therefore, carefully consider whether such trading is suitable for you in light of your circumstances and financial resources. You should be aware of the following points:
You may sustain a total loss of the funds that you deposit with your broker to establish or maintain a position in the commodity futures market, and you may incur losses beyond these amounts
The funds you deposit with a futures commission merchant for trading event contracts positions are not protected by insurance in the event of the bankruptcy or insolvency of the futures commission merchant, or in the event your funds are misappropriated.
The funds you deposit with a futures commission merchant for trading event contracts are not protected by the Securities Investor Protection Corporation.
The funds you deposit with a futures commission merchant are generally not guaranteed or insured by a derivatives clearing organization in the event of the bankruptcy or insolvency of the futures commission merchant, or if the futures commission merchant is otherwise unable to refund your funds. Certain derivatives clearing organizations, however, may have programs that provide limited insurance to customers.
The funds you deposit with a futures commission merchant are not held by the futures commission merchant in a separate account for your individual benefit. Futures commission merchants commingle the funds received from customers in one or more accounts and you may be exposed to losses incurred by other customers if the futures commission merchant does not have sufficient capital to cover such other customers' trading losses.
The funds you deposit with a futures commission merchant may be invested by the futures commission merchant in certain types of financial instruments that have been approved by the Commission and the future commission merchant’s approved policies on file with the National Futures Association for the purpose of such investments. Permitted investments are listed in Commission Regulation 1.25 (17 CFR 1.25) and include: U.S. government securities; municipal securities; certain money market funds; certain foreign sovereign debt; and U.S. Treasury exchange-traded funds. The futures commission merchant may retain the interest and other earnings realized from its investment of customer funds. You should be familiar with the types of financial instruments that a futures commission merchant may invest customer funds in.
Futures commission merchants are permitted to deposit customer funds with affiliated entities, such as affiliated banks, securities brokers or dealers, or foreign brokers. You should inquire as to whether your futures commission merchant deposits funds with affiliates and assess whether such deposits by the futures commission merchant with its affiliates increases the risks to your funds.
You should consult your futures commission merchant concerning the nature of the protections available to safeguard funds or property deposited for your account.
Under certain market conditions, you may find it difficult or impossible to liquidate a position. This can occur, for example, when the market reaches a daily price fluctuation limit (“limit move”).
All event contract positions involve risk of the loss of capital regardless of your trading strategy.
In addition to the risks noted in the paragraphs enumerated above, you should be familiar with the futures commission merchant you select to entrust your funds for trading event contracts. The Commodity Futures Trading Commission requires each futures commission merchant to make publicly available on its Web site firm specific disclosures and financial information to assist you with your assessment and selection of a futures commission merchant. Information regarding this futures commission merchant may be obtained by visiting our Web site, www.sleeper.com.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS OF THE COMMODITY MARKETS.