The Commodity Futures Trading Commission (CFTC) is seeking public comment on potential changes to prediction markets regulations and has issued an advisory notice on contracts, including sports-related event contracts.
The Advanced Notice of Proposed Rulemaking was published on Thursday and seeks input on the types of event contracts that may be prohibited as contrary to the public interest, cost-benefit considerations related to prediction markets, and other topics.
The findings of the public consultation will be used by the CFTC to inform potential future agency action.
The public comment period closes 45 days after yesterday’s publication of the notice in the Federal Register.
The announcement of the public consultation came on the same day as a prediction markets advisory from the CFTC’s Division of Market Oversight.
“In light of the rapid rise in popularity of prediction markets, the division seeks to encourage growth and innovation in these markets while reminding designated contract markets of their regulatory obligations pursuant to the Commodity Exchange Act and Commission regulations,” the Division said in a statement Thursday.
The advisory underscores Designated Contract Markets’ (DCMs) regulatory obligations with respect to section 5 of the Commodity Exchange Act (CEA), which gives the CFTC authority to prohibit event contracts that are contrary to the public interest.
This includes activity that is unlawful under any federal or state law, terrorism, assassination, war, and gaming.
It also highlights DCMs’ obligations under 23 core principles of the CEA.
The advisory letter states that prediction markets event contracts are rapidly increasing in popularity with the American public, both as a financial asset class and as a proven source of reliable information for news media, sports leagues, financial institutions, and everyday Americans.
“As front-line regulators, DCMs should be proactive, ensuring proper surveillance and oversight of trading in all of the products that they list, accounting for the particular characteristics and attributes of each product,” says the Division.
“Under DCM Core Principle 3, each DCM has a specific statutory obligation to list for trading only derivative contracts that are not readily susceptible to manipulation. Core Principle 4 requires a DCM to have the capacity and responsibility to prevent manipulation, price distortion, and disruptions of the delivery or cash settlement process, through market surveillance, compliance, and enforcement practices and procedures. And Core Principle 12 requires a DCM to establish and enforce rules to protect markets and market participants from abusive practices, and to promote fair and equitable trading on the DCM.”
The Division explains that to meet these obligations, a DCM must, among other things, conduct real-time monitoring of all trading activity on its trading platform(s) to identify disorderly trading and any market or system anomalies.
“Commission staff further reminds DCMs and market participants that Commission Regulation 180.1 makes it unlawful for any person to employ any device, scheme, or artifice to defraud or attempt to defraud any person or manipulate the price of any contract listed on a DCM. Without limitation, these practices include misappropriation of confidential information […].”
The Division reminds DCMs that they are obliged to only list event contracts that are not readily susceptible to manipulation.
“Accordingly, DCMs are encouraged to consider whether certain categories of event contracts create a heightened potential for manipulation or price distortion. For example, in the context of sports-related event contracts, such contracts could involve those that resolve or settle based on injuries to individual sports participants, unsportsmanlike conduct, or physical altercations between sports participants, as well as contracts that resolve or settle based on the action of a single individual or a small group of individuals, such as officiating actions occurring during a sporting event.”
The Division advises DCMs that sports-related event contracts have often been shown to be consistent with DCM Core Principle 3 where the settlement outcome depends on the aggregate performance of multiple participants over an extended period of play, as this reduces the ability of any single actor to manipulate the outcome.
The Division adds that the CFTC is actively discussing issues of settlement integrity with some relevant sports leagues and their governing bodies and foresees that appropriate information sharing by these entities with the CFTC may lead to enhanced CFTC oversight capabilities.
In the meantime, DCMs are encouraged to establish information-sharing and data arrangements with the relevant sports integrity monitoring organization and only rely on official data provided by the relevant league or governing body.
The CFTC statement concludes: “The division believes that, as front-line regulators, DCMs should take proactive steps to ensure their markets continue to evolve in a manner that complies with the CEA and Commission regulations.”
In related news, Representative Mike Levin and US Senator Adam Schiff of California announced bicameral legislation this week to prohibit event contracts related to war and death.
The proposed bill from the Californian lawmakers followed the introduction of another prediction markets bill earlier this week in the House of Representatives, with this bill seeking to prohibit event contracts related to terrorism, assassination, war, gaming, or illegal activity.