Prediction market roundup: CFTC release of proposed rules elicit polarised views from key stakeholders

The release of a broad set of proposed rules on prediction markets by the US regulator on derivatives has generated polarised response from stakeholders on the near-term implications of the sweeping guidelines.

On Wednesday, the US Commodity Futures Trading Commission issued its first notice of proposed rulemaking regarding prediction markets, completing the initial phase in establishing a regulatory framework for the fast-growing industry.

The lengthy proposal outlines a standard for the regulatory treatment of event contracts on prediction markets, a new asset class that, by some estimates, could eclipse $1 trillion in annualised trading volume in 2030. Supporters of the nascent sports derivatives enumerated the commercial benefits that could be unlocked by the comprehensive guidelines, while detractors vented that unfavourable federal regulations will trample states’ rights.

Approximately 24 hours after the CFTC released the proposed guidelines, Chairman Michael Selig made an appearance on Fox Business, where he told host Maria Bartiromo that the agency will set rules and guidelines that will clarify the types of sports products that are “suitable for trading” across the nation. The proposed regulations were published in the federal register on Friday, triggering a 45-day comment period for the public to respond.

Explaining the “Special Rule”

In the wake of the 2008 Financial Crisis, Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, introducing new requirements for swaps under the Commodity Exchange Act. One provision of the CEA, Section 5c(c)(5)(C), also known as the “Special Rule,” gives the CFTC the authority to prohibit certain event contracts if the transactions are “contrary to the public interest”. Subsequently, the CFTC passed Regulation 40.11, a rule that allows the regulator to restrict certain contracts if the trades involve war, assassination, terrorism and gaming, among other categories.

The CFTC proposes to amend the Special Rule with a new definition on “gaming.” While the preliminary regulations outlaw certain trades on officiating decisions and injuries incurred during a game, the proposed regulations still allow the vast majority of sports-event contracts currently available on the market.

Former CFTC chair Gary Gensler, who held the post during the passage of Dodd-Frank, told CNBC this week that he testified before Congress more than four dozen times during his tenure. He does not recall addressing sports event contracts in relation to Dodd-Frank or the CEA, even once. Gensler believes that states, not the federal government, should be in position to regulate sports wagering.

“What they’re trying to do is to say that they have authority over sports betting, which I don’t think they do,” he said of the CFTC.

The public interest test

Moving forward, stakeholders may hone in on language surrounding a so-called “public interest test”. Within the document, the keyword “interest” appears a total of 515 times. In the Fox interview, Selig noted that when a Designated Contract Market self-certifies a contract, the CFTC will evaluate if it is contrary to the public interest, a consideration required by the statute.

Peter Sanchez Guarda, former agency counsel at the CFTC, explained that the core challenge with a broad public interest yardstick is that it risks turning a regulatory standard into a moving target.

“If you don’t have a precise, bright-line definition, DCMs face the compliance nightmare of trying to hit an ambiguous benchmark,” he told iGB.

At least three prominent special-interest groups — the American Gaming Association, the Indian Gaming Association and Gambling Is Not Investing — expressed strident criticism toward the CFTC regarding the construct of the proposed regulations. AGA President Bill Miller described the preliminary rules as a “remarkable attempt” to redefine what constitutes sports betting.

Conversely, former Arena Football League Commissioner Randall Boe mused that the new rules could represent an important new source of revenue for teams and leagues alike. Boe, a sports transactions and media rights expert, added that the CFTC’s focus on prediction markets in connection with facilitating hedging strategies could spur the development of sophisticated platforms for sports investors looking to hedge their risks on sports outcomes.

Other developments on the week

–Roughly eight months after submitting a DCM application to the CFTC, ProphetX gained approval on Thursday to list sports event contracts on a new prediction market exchange. The ProphetX platform includes a proprietary Request for Quote (RFQ) parlay mechanism, which enables users to construct and price multi-event combinations directly with counterparties. “We can now expand our best-in-class sports event market offerings to millions of Americans across the country while competing on a level regulatory playing field,” ProphetX CEO Dean Sisun said in a statement.

–A slew of operators either forged partnerships or launched new products on the week. ADI Predictstreet, which went live with a prediction market-platform on 8 June, is offering a co-branded World Cup Hub with Fanatics Markets. As of Friday, Kalshi handled approximately $188.6 million in trading volume on World Cup futures. Two traditional European powers, Spain and France, remained as co-favourites at 17%. The US opens World Cup play on Friday in a Group D tilt against Paraguay.

–This year’s World Cup in North America marks the first time the world’s most popular sporting event has returned to the US in more than 30 years. Nevertheless, 11 teams had better odds on Kalshi as of Friday, including fellow host Mexico, at 2%. A $100 contract on the US to hoist the Jules Rimet Trophy will carry a payout of approximately $5,197.80.