The Commodity Futures Trading Commission, a registered beneficiary of Alphaville’s ire, proposed a rule change earlier this month that may ban event contracts from the U.S. derivatives market — ending a years-long push to trade options on sports games, awards ceremonies and perhaps most critically, choices.
The CFTC amendment would expand the types of contracts that can be considered “gaming” and therefore prohibited under the FTC because of their impact on the “public interest.” As CFTC Chairman Rostin Behnam summarized, emphasizing FTAV:
The proposal includes a determination that event contracts involving each of the enumerated activities in section 5c(c)(5)(C) of the CEA (gaming, war, terrorism, assassination, and activity that is unlawful under state law) are, as a category, in violation with public interest and therefore may not be listed for trading or accepted for settlement through a registered entity. Thus, the illustrative examples of gaming that I have just given are against the public interest and cannot be brought up for trading.
To be clear, this means that contracts on events about the outcome of a political contest, such as an election, could not be listed for trading or accepted for settlement under the proposed rule. Not only do such contracts not serve the economic purpose of futures markets—they are illegal in several states and could potentially and impermissibly preempt the state’s responsibility to oversee federal elections. This is not a new phenomenon for the CFTC. Over the past 20 years, the CFTC has remained steadfast through multiple administrations that election or political contracts should not be permitted in the US futures and options markets.
This antipathy to election contracts, on which Benham spends most of his statement, is a well-documented position of the CFTC – and broadly representative of US regulators’ views on political prediction markets.
Despite persistent lobbying by event contract platforms, the CFTC and the Senate body that regulates it (in a historical joke, the Committee on Agriculture, Food and Forestry) have decided to allow political event betting platforms to exist only for “academic purposes” such as gauging investor sentiment regarding the upcoming election. In the past, they have taken steps to shut down PredictIt, the largest election betting site, and actively monitor the election portions of other betting sites at events such as the Iowa Electronics Market.
From a global perspective, that might be, dare we say, conservative. The stance of the CFTC and other U.S. regulators makes the U.S. unique among other advanced economies, as popular global betting exchanges such as UK bookmaker Betfair and Canada’s FanDuel must explicitly bar Americans from voting on their election exchanges.
The regulator’s position is not that election betting itself is illegal – it, like most betting in America, depends on the individual states. The difference is that the CFTC doesn’t want to see the creation of a formal market that falls under US federal jurisdiction (not unlike the Treasury Committee’s recent stance on the regulation of bare-bones crypto exchanges).
But in this view of this American author (a former PredictIt user who often bet on the number of times a day Donald Trump tweets in the White House), the CFTC’s position on election markets is coherent. From Benham’s statement:
Contracts involving political events ultimately commoditize and degrade the integrity of the uniquely American experience of participating in the democratic electoral process. Allowing these contracts would put the CFTC, the financial market regulator, in a position far beyond its mandate and congressional expertise. Frankly, such contracts would put the CFTC in the role of election policeman.
Aside from Benham’s obvious implication that only Americans vote (because to Americans, of course, the US is the only democracy in the world), in the weakened state of the republic, it would be unwise to put anything election-related into shoddy hands. CFTC (our wrath again).
One can certainly argue the usefulness of polling data and concerns about unregulated markets, but for now, protecting American democracy from more contact with capitalism and the CFTC is most certainly in the “public interest.”
But when it comes to the proposed rule itself. . . well, let’s just say the CFTC is at it again.
The constituency has broad support from the CFTC’s five commissioners (sorry, investors). But there is widespread disagreement with the rest of the policy, best summed up in CFTC Commissioner Summer K. Mersinger’s sharp disagreement with FTAV’s emphasis:
The proposal’s exaggerated definition of “games” would be enough to make me disagree. But the most insolent overreach of the Proposal is its pre-established that any contract for an action that involves an enumerated activity is automatically contrary to the public interest – regardless of the terms of that contract.
The proposal would outlaw these contracts – sight unseen – by declaring entire categories of stock contracts to be against the public interest. However, according to the CEA, the Commission lacks statutory authority to make public interest decisions by category.
The Proposal justifies its approach (on page 37) by saying that “the law does not require that this public interest determination be made on the basis of a specific contract.” This is backwards. The CFTC is a creature of law and has only the powers granted to it by the CEA. There is no provision in section 5c(c)(5)(C) of the CEA for public interest determinations regarding event contracts involving enumerated activities to be performed by category. The Commission cannot therefore claim this authorization through ipse dixit “Congress didn’t say we can’t.
Let alone the legitimate questions she and fellow Commissioner Caroline D. Pham have raised about jurisprudence, an issue that has overshadowed other problems with the CFTC. More interesting is what Mersinger calls the proposed “game” definition, which is the main change in this proposal (our emphasis):
The wager or risk by any person of anything of value on the outcome of a political contest, including an election or election, prize competition or game in which one or more athletes compete, or the appearance or absence in connection with such competition or game, regardless of whether it directly affects the outcome.
Yes, baseball is “America’s favorite past time.” However, it is questionable to apply the same “public interest” argument used for electoral markets to sports markets. And can the same really be said for all award competitions like the Oscars?
This also goes against the CFTC’s longstanding efforts to properly regulate event markets. While the regulator has been a longtime opponent of betting on elections, the CFTC has made progress in regulating exchanges for other forms of event contracts. This progress has even brought in institutional investors, with SIG recently agreeing to become a market maker on the Kalshi event exchange.
Another critical quote here is “whether it directly affects the outcome”. Hedging bets on who will win the election, the Oscar for Best Actor, or the Super Bowl is one thing. But limiting the possibilities to other external binary events, such as the size of the inauguration crowd, whether Timothée Chalamet will wear a tuxedo to the Oscars (not a bet I’d take), or the length of Super Bowl commercials would hardly qualify as “in the public interest,” and the potential for perverse incentives seems much more difficult to demonstrate.
The regulatory rationale behind this CFTC proposal is already difficult for many to bet on elections. But that’s especially hard to swallow for other “game” categories. The sports industry has decades of experience overseeing insider betting (disgraced American baseball player Pete Rose comes to mind). And while it’s not as big as the MLB or NBA, the Academy and other awards certainly have some ability to regulate themselves (as evidenced by the PwC review after the Moonlight snafu).
But like the election, the reason for the CFTC’s VERY broad definition of “gaming” seems to come from the idea that the real “public interest” is in the CFTC not having to say anything. Sports and event betting are still not fully legal in all US states, and police scrutiny seems too much for the CFTC’s dismal record. This is even revealed in Benham’s statement, with FTAV emphasis:
Beginning in 2021, there has been a significant increase in the number of event contracts listed for trading on CFTC-registered exchanges. To put the increase into perspective, More event contracts were listed for trading in 2021 than were listed in the previous 15 years combined. And it’s been true every year since. . .
We are tasked with advancing the public interest by ensuring that US derivatives markets provide the means to manage and assume price risk and ensure price discovery through liquid, fair, open, transparent and financially secure trading facilities. Market integrity features so prominently in this mandate that the CFTC has civil enforcement authority over the potential for fraud, manipulation, and other abuse, such as the dissemination of false information in the underlying or commodity cash markets. Political control agreements on CFTC-regulated exchanges would move the CFTC far beyond this historical expertise and jurisdiction and potentially put the CFTC in a position to monitor such markets for fraud and manipulation of the elections themselves. . .
Benham is mostly discussing the election part, but his statement seems to be aimed at the broad definition that the proposal supports. “Public interest” in this case means the CFTC didn’t screw up, not actual basic fairness, practicality, or the public good of the market.
The proposal still has time to be fine-tuned by the CFTC, with a July 9 comment deadline. There will certainly be a flurry of lobbying from groups like Kashi, FanDuel and other platforms. And we expect much more, due to the mixed logic and vague definitions used. As Mersinger says:
The fact that some parts of the proposal are imprecise, extremely weak or simply do not make sense suggests that it was either hastily prepared or is motivated primarily by the sheer hatred the Commission seems to have for action contracts.