The advisory is intended to alert DCMs that mention market contracts may present a heightened risk of susceptibility to manipulation
The Commodity Futures Trading Commission (CFTC) has issued an advisory that addresses the listing and trading of “mention market” event contracts.
Commonly referred to as “mention market” contracts, these event contracts are based on whether an individual will say or “mention” certain words, attend or appear at an event, or otherwise interact with another person.
According to the CFTC’s Division of Market Oversight, these contract types present a heightened risk of manipulation because their settlement turns on the discrete conduct of a person that may be neither independently generated nor externally verifiable.
The advisory outlines the limited circumstances in which such contracts may be listed consistently with the Commodity Exchange Act and CFTC regulations, and provides non-exhaustive examples of factors that Designated Contract Markets (DCMs) should consider when designing and submitting mention market contracts under Commission Regulations Sections 40.2 or 40.3.
“Most event contracts currently listed on DCMs settle on independently generated, externally verifiable outcomes that are outside the control of any single person, such as economic data releases, election results, or the outcomes of regulated sporting events. Mention Markets are different,” said the CFTC. “Their settlement turns not on an aggregate outcome but on the discrete conduct of a named person, and that conduct may be neither independently generated nor externally verifiable.
“Such contracts therefore present a distinct set of regulatory considerations, particularly as to whether they are readily susceptible to manipulation.”
The advisory also reminds DCMs of their obligation under Core Principle 3 to list only contracts that are not readily susceptible to manipulation, and emphasizes the importance of providing complete, contract‑specific analysis when submitting these products under Part 40.
“Mention Markets allow market participants to take positions on whether a specific individual will use certain words or phrases in a defined or specified public forum, such as during a speech, on an earnings call, or on social media,” continued the CFTC. “Attendance- and interaction-based (e.g. by shaking hands, being photographed together, or engaging on social media) event contracts listed by DCMs have similarly depended on the discrete conduct of an individual.
“In certain circumstances where the costs of manipulation or the likelihood of detection is low and sufficient safeguards are absent, the person whose conduct determines settlement (or those in close proximity of such person) may readily influence the outcome of the contract, exploit advance knowledge of it, or both.
“Similarly, contracts that settle on individual actions occurring in informal or private settings or by non-public persons may present increased risk of manipulation because they lack the benefit of public scrutiny and independent verification.”
In limited circumstances, the CFTC said that a well-designed contract coupled with DCM trading rules, surveillance, and controls may be sufficient to rebut the presumption that mention markets are readily susceptible to manipulation.
A number of factors are particularly relevant to that determination, including independent obligations constraining the controlling individual; susceptibility to manipulation through external pressure directed at controlling individuals; independent verification and substantial public scrutiny; and robustness of prophylactic trading rules, surveillance and controls.
“Complete, transparent, and well-supported submissions facilitate staff and Commission review and help ensure that contracts listed for trading operate in a manner consistent with the Act and Commission regulations, including the requirement that contracts not be readily susceptible to manipulation,” concluded the CFTC.