The Commodity Futures Trading Commission, a chronicled recipient of Alphaville’s ire, earlier this month proposed a rule change that may ban events contracts from the US derivatives market — potentially ending the multiyear push for options trading on sports games, award ceremonies, and, perhaps most critically, elections.
The CFTC’s amendment would expand the types of contracts that can be considered “gaming,” and thus banned under the FTC due to their impact on the “public interest”. As summarised by CFTC Chair Rostin Behnam, with FTAV’s emphasis:
The proposal includes a determination that event contracts involving each of the Enumerated Activities in CEA section 5c(c)(5)(C) (gaming, war, terrorism, assassination, and activity that is unlawful under state law) are, as a category, contrary to the public interest and therefore may not be listed for trading or accepted for clearing through a registered entity. The illustrative examples of gaming that I just mentioned are therefore contrary to the public interest and cannot be listed for trading.
To be clear, that means that event contracts on the outcome of a political contest such as an election could not be listed for trading or accepted for clearing under the proposed rule. Such contracts not only fail to serve the economic purpose of the futures markets—they are illegal in several states and could potentially and impermissibly preempt State responsibilities for overseeing federal elections. This is not a new phenomenon for the CFTC. Over the course of the last 20 years, the CFTC has remained steadfast—through many administrations—that election or political contracts should not be allowed on the US futures and options markets.
This antipathy towards election contracts, which Benham spends the most of his statement on, is well-documented CFTC stance — and broadly representative of US regulators’ views on political predictions markets.
Despite persistent lobbying by event contracts platforms, the CFTC and the Senate body that regulates it (by quirk of history, the Committee on Agriculture, Nutrition, and Forestry) have been firm that they will only allow political events betting platforms to exist for “academic purposes”, like gauging investor sentiment about an upcoming election. They have made moves in the past to shut down PredictIt, the largest elections betting site, and actively monitor the elections portions of other events betting sites, like the Iowa Electronics Market.
This might read as a bit, dare we say, conservative from a global perspective. The stance by the CFTC and other American regulators makes the US strange among other advanced economies, with popular global betting exchanges like UK bookies Betfair and Canada’s FanDuel required to specifically bar Americans from voting on their elections exchanges.
The regulator’s stance is not that elections betting itself is illegal — that, like most other betting in America, is up to individual states. The distinction here is that the CFTC does not want to see the creation of a formal market, which falls under US federal jurisdiction (not unlike the Treasury Committee’s recent stance on regulating unbacked crypto exchanges).
But in this view of this American author (a former user of PredictIt, having made frequent bets on the number of times a day Donald Trump would tweet in the White House), the CFTC’s stance on elections 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 push the CFTC, a financial market regulator, into a position far beyond its Congressional mandate and expertise. To be blunt, such contracts would put the CFTC in the role of an election cop.
Putting aside Benham’s apparent implication that only Americans vote (because to Americans, of course, the US is the world’s only democracy), with the enfeebled state of the republic it would be ill-advised to put anything related to the election in the shoddy hands of the CFTC (again, our ire).
There are definitely arguments to be made for the usefulness of the data for polling and fears of unregulated markets emerging, but protecting American democracy, for the time being, from more contact with capitalism and the CFTC is certainly in the “public interest”.
But as for the actual proposed rule itself . . . well let’s just say that the CFTC is at it again.
The elections portion has the broad support of the CFTC’s five commissioners (sorry, investors). But there is broad disagreement on the rest of the policy, best summarised in a scathing dissent by CFTC commissioner Summer K. Mersinger, with FTAV’s emphasis:
The overbreadth of the Proposal’s “gaming” definition would suffice for me to dissent. But the Proposal’s most brazen overreach is its determination, in advance, that every event contract that involves an enumerated activity is automatically contrary to the public interest – regardless of the terms and conditions of that contract.
The Proposal would prohibit these contracts – sight unseen – through the shortcut of declaring entire categories of event contracts to be contrary to the public interest. But the Commission lacks legal authority under the CEA to make public interest determinations by category.
The Proposal’s justification for its approach (at page 37) is that “the statute does not require this public interest determination to be made on a contract-specific basis.” This is backwards. The CFTC is a creature of statute, and has only the authorities granted to it by the CEA. There is no provision in CEA Section 5c(c)(5)(C) for public interest determinations regarding event contracts involving enumerated activities to be made by category. Accordingly, the Commission cannot claim that authority through the ipse dixit of “Congress didn’t say we couldn’t.”
Let’s ignore the legitimate questions she and fellow commissioner Caroline D. Pham raise of jurisprudence, an issue that has shaded other issues with the CFTC. What’s more interesting is how Mersinger calls out the proposed “gaming” definition, which is the main change in this proposal (our emphasis):
The staking or risking by any person of something of value upon the outcome of a political contest, including an election or elections, an awards contest, or a game in which one or more athletes compete, or an occurrence or non-occurrence in connection with such a contest or game, regardless of whether it directly affects the outcome.
Yes, baseball is “America’s favourite past time.” But it is dubious to use the same “public interest” argument deployed for election markets on sports markets. And could the same issues really be said of all awards contests, like the Oscars?
This also flies against long-standing efforts by the CFTC to properly regulate events markets. While the regulator has been a longtime opponent of elections betting, the CFTC had been making progress regulating exchanges for other forms of events contracts. That progress has even brought in institutional investors, with SIG recently agreeing to become a market maker on events exchange Kalshi.
The other critical quote here is “whether it directly affects the outcome”. Curbing betting on who will win an election, the Oscar for best actor, or the Super Bowl is one thing. But limiting options on other extraneous binary events like inauguration crowd size, whether Timothée Chalamet will wear a tuxedo to the Oscars (not a bet I would take), or the length of Super Bowl commercials could hardly be viewed as “in the public interest,” and the potential for perverse incentives seems much more difficult to prove.
The CFTC’s regulatory rationale for this proposal is already difficult for many to buy into for elections betting. But it is especially hard to swallow for the other categories of “gaming”. The sports industry has decades of experience policing internal betting (disgraced American baseball player Pete Rose comes to mind). And while it is not as large as the MLB or NBA, certainly the Academy and other awards shows have some capacity to regulate themselves (as evidenced by the PwC review after the Moonlight snafu).
But like elections, the reason for the CFTC’s VERY broad definition of “gaming” seems to come from the idea that the real “public interest” lies in the CFTC stopping itself from needing to have a say. Sports betting and events betting are still not fully legal in all American states, and policing the issue seems too big for the CFTC’s paltry record. This is even revealed in Benham’s statement, with FTAV’s emphasis:
Starting in 2021, there has been a significant uptick in the number of event contracts listed for trading by CFTC-registered exchanges. To put that increase into perspective, more event contracts were listed for trading in 2021 than had been listed in the prior 15 years combined. And that has continued to be true each year since . . .
We are tasked with upholding the public interest by ensuring that America’s derivatives markets provide a means for managing and assuming price risks and providing for price discovery through liquid, fair, open, transparent, and financially secure trading facilities. Market integrity is featured so prominently within that mandate that the CFTC has civil enforcement authority when it comes to the potential for fraud, manipulation, and other abuses such as the dissemination of false information in the underlying or commodity cash markets. Political control contracts on CFTC-regulated exchanges would push the CFTC far beyond this historical expertise and jurisdiction, and potentially place the CFTC in the position of monitoring such markets for fraud and manipulation in elections themselves . . .
Benham mostly discusses the elections portion, but his statement seems to be addressing the broad definition the proposal promotes. “Public interest” in this case is the CFTC not screwing up, not the actual fundamental fairness, practicality or public good of the market.
The proposal still has time to be ironed out by the CFTC, with a commenting period in effect until July 9. There will certainly be a rush of lobbying from groups like Kashi, FanDuel, and other platforms. And we expect there will be a great deal more, due to the mixed logic and vague definitions employed. As Mersinger says:
The fact that certain portions of the Proposal are inaccurate, extremely weak, or simply make no sense suggests that it either was hastily prepared, or is motivated primarily by the sheer hatred that the Commission seems to bear towards event contracts.
