CFTC updates prediction markets policies in latest guidance
The Division of Market Oversight released a staff advisory, designated as CFTC Letter No. 26-08, to clarify expectations for registered exchanges that list these instruments.
The clarification follows an announcement earlier this month about the development of new guidance.
The document, titled Prediction Markets Advisory, specifically targets designated contract markets that have seen a surge in public interest regarding event contracts as a financial asset class and information source.
The acting director of the Division of Market Oversight, Frank N. Fisanich, noted that while the agency aims to encourage innovation, growth must occur within the existing federal oversight framework.
The advisory identifies prediction markets as platforms where event contracts, often structured as binary options or swaps, allow users to trade on the occurrence or non-occurrence of an underlying event.
These contracts typically settle based on a potential financial, economic, or commercial consequence. The CFTC’s new guidance also singles out sports contracts.
A primary focus of the advisory involves the obligations of exchanges to act as front-line regulators.
Designated contract markets, even those on sports, are required to comply with 23 statutory core principles to maintain market integrity.
Core Principle 3 demands that exchanges only list contracts that are not readily susceptible to manipulation.
Core Principle 4 requires platforms to possess the capacity and responsibility to prevent price distortion and disruptions through active surveillance and enforcement.
Sports contracts carry more risks
The advisory highlights particular risks associated with sports-related event contracts. It states that exchanges must be proactive in ensuring proper oversight, accounting for the unique characteristics of each product.
Staff members suggested that proactive engagement with sports leagues or governing bodies may reduce the likelihood of commission action regarding potential manipulation.
The guidance also reminds participants that the commission retains the authority to investigate and bring civil enforcement actions for activities such as insider trading or the misappropriation of confidential information.
This staff-level guidance arrives alongside a more formal move by the commission to evaluate the broader regulatory landscape for these assets.
As the agency clarifies existing compliance hurdles for exchanges, it is simultaneously initiating a comprehensive review of the rules that define which events are suitable for public trading.
The commission issued an advance notice of proposed rulemaking, identified as RIN 3038-AF65, to seek public comment on the future of prediction market regulation.
This document, published in the Federal Register, indicates a significant shift in the volume of market activity. Between 2006 and 2020, registered exchanges listed an average of five event contracts per year.
https://next.io/news/regulation/cftc-updates-prediction-markets-policies/
This figure rose to 131 in 2021 and reached approximately 1,600 certified contracts by 2025.
The secretary of the commission, Christopher Kirkpatrick, stated that the agency is seeking information on how statutory core principles should apply specifically to these markets.
Public interest could sway CFTC guidance
One of the central questions in the notice concerns the public interest test established by the Commodity Exchange Act.
The commission has the authority to prohibit contracts that involve activity such as assassination, terrorism, war, gaming, or other similar conduct determined to be contrary to the public interest.
The agency is now asking for input on the procedural aspects of these prohibitions and whether certain types of event contracts should be restricted entirely.
The notice also addresses the changing composition of the industry. The number of applications for exchange registration has more than doubled over the past year, with many entities interested exclusively in operating prediction markets.
In light of this trend, the commission is investigating the cost and benefit considerations of new rules, including the impact on small entities.
The Small Business Administration sets the receipts threshold for small securities and commodity exchanges at $47m, a figure the commission is using to evaluate the potential economic consequences of its regulatory decisions.
The commission is further exploring the risks of inside information and the adequacy of current market surveillance practices.
Questions raised in the document ask whether dispute resolution procedures used in other derivative markets, such as credit default swaps, would be appropriate for resolving triggers in event contracts.
The public has been given a 45-day window from 12 March, the date of publication, to submit written comments through the commission portal or by mail.
A summary of the commission vote showed that Chairman Selig voted in the affirmative to issue the notice, with no commissioners voting in the negative.
https://next.io/news/regulation/cftc-updates-prediction-markets-policies/