The Commodity Futures Trading Commission, a well-known recipient of Alphaville’s wrath, proposed a rule change earlier this month that could ban event contracts from the U.S. derivatives market – potentially ending a years-long push for options trading in sports games, awards shows and perhaps most others ended Critical: elections.
The CFTC amendment would expand the types of contracts that may be considered “gaming” and therefore prohibited under the FTC due to their impact on the “public interest.” As summarized by CFTC Chairman Rostin Behnam, with a focus on FTAV:
The proposal includes a provision that event contracts that include any of the activities listed in Section 5c(c)(5)(C) of the CEA (gambling, war, terrorism, assassination, and activity unlawful under state law) as one Category apply This is against the public interest and therefore must not be admitted to trading or accepted for clearing through a registered entity. The illustrative gambling examples just mentioned are therefore contrary to the public interest and cannot be admitted to trading.
To be clear, this means that event contracts relating to the outcome of a political contest such as an election would not be able to be listed for trading or accepted for clearing under the proposed rule. Not only do such contracts fail to serve the economic purpose of the futures markets, but they are illegal in several states and could potentially and impermissibly interfere with the state’s responsibility to oversee federal elections. This is not a new phenomenon for the CFTC. Over the last 20 years, the CFTC has steadfastly maintained – across many administrations – that elections or political contracts should not be permitted in the U.S. futures and options markets.
This aversion to election contracts, to which Benham devotes most of his opinion piece, is a well-documented stance of the CFTC – and broadly representative of U.S. regulators’ views on political forecasting markets.
Despite continued lobbying by event contracting platforms, the CFTC and the Senate panel that regulates them (by a whim of history, the Committee on Agriculture, Food and Forestry) remain adamant that they allow the existence of political event betting platforms only for ” Academics will allow this for “purposes,” such as gauging investor sentiment about an upcoming election. They have taken steps in the past to shut down PredictIt, the largest election betting site, and to actively monitor the voting sections of other event betting sites, such as the Iowa Electronics Market.
From a global perspective, this could perhaps be read somewhat conservatively. The stance of the CFTC and other American regulators makes the US strange compared to other advanced economies, as popular global betting exchanges such as British bookmakers Betfair and Canada’s FanDuel are required to specifically exclude Americans from voting on their election exchanges.
The regulator does not take the position that election betting itself is illegal – that, like most other betting in America, is a matter for individual states. The difference is that the CFTC does not want to see the creation of a formal market that falls under US federal jurisdiction (similar to the Treasury Board’s recent stance on regulating unsecured crypto exchanges).
But in this view of this American author (a former PredictIt user who frequently bet on how many times a day Donald Trump would tweet in the White House), the CFTC’s stance on election markets makes sense. From Benham’s statement:
Contracts involving political events ultimately commodify and compromise the integrity of the quintessentially American experience of participating in the democratic electoral process. Approving these contracts would place the CFTC, a financial markets regulator, in a position well beyond its congressional mandate and expertise. To be clear, such contracts would put the CFTC in the role of election police.
Leaving aside Benham’s obvious suggestion that only Americans can vote (for Americans, of course, the United States is the only democracy in the world), it would be ill-advised to do anything related to the election, given the weakened state of the Republic to lay the sleazy hands of the CFTC (again earning our ire).
There are definitely arguments for the usefulness of the data for polling and for the fear that unregulated markets could emerge, but protecting American democracy from further exposure to capitalism and the CFTC is certainly in the “public interest.”
But as for the actual proposed rule itself. . . Well, let’s just say the CFTC is at it again.
The election portion enjoys the broad support of the CFTC’s five commissioners (sorry, investors). However, there is widespread disagreement over the rest of the policy, best summed up in a scathing dissent from CFTC Commissioner Summer K. Mersinger, with FTAV focusing on:
Over-interpreting the proposal’s definition of “gambling” would be enough to contradict my opinion. But the proposal’s blatant exaggeration is its determination in advance that any event contract that includes any of the enumerated activities is automatically contrary to the public interest – regardless of the terms of this contract.
The proposal would ban these contracts – without being seen – by declaring, as a shorthand, entire categories of event contracts as contrary to the public interest. However, under the CEA, the Commission lacks the legal authority to make public interest decisions by category.
The Proposal’s justification for its approach (at page 37) is that “the law does not require that this public interest determination be made on a contract-specific basis.” This is backwards. The CFTC is a statutory body and only has the powers granted to it by the CEA. Section 5c(c)(5)(C) of the CEA does not provide that public interest determinations must be made by category with respect to event contracts involving enumerated activities. Therefore, the Commission cannot invoke this power through the ipse dixit of “Congress didn’t say we couldn’t do this.”
Let’s ignore the legitimate questions she and her commissioner, Caroline D. Pham, raise about case law, an issue that has overshadowed other problems with the CFTC. More interesting is what Mersinger calls the proposed “gaming” definition, which represents the most important change in this proposal (our focus):
A person’s staking or risking something of value as to the outcome of a political contest, including one or more elections, a prize competition or game in which one or more athletes compete against each other, or any occurrence or non-occurrence in connection with such competition or game, regardless of whether it directly affects the result.
Yes, baseball is “America’s favorite pastime.” However, it is doubtful to use the same “public interest” argument used for election markets in sports markets. And can the same really be said of all award shows, such as the Oscars?
This also contradicts the CFTC’s longstanding efforts to properly regulate the event markets. While the regulator has long been an opponent of election betting, the CFTC has made strides in regulating exchanges for other forms of event contracts. This advancement has even attracted institutional investors, with SIG recently agreeing to become a market maker on events exchange Kalshi.
The other important quote here is “whether it directly impacts the bottom line.” Curbing bets on who will win an election, the Best Actor Oscar, or the Super Bowl is one thing. But limiting the options to other irrelevant binary events like the size of the crowd at the inauguration, whether Timothée Chalamet will wear a tuxedo to the Oscars (not a bet I would take), or the length of Super Bowl commercials could can hardly be considered “in the public interest”. ” and the potential for perverse incentives seems much harder to prove.
The CFTC’s regulatory rationale for this proposal is already difficult for many to accept when it comes to election betting. But it’s particularly difficult to digest when it comes to the other categories of “gaming”. The sports industry has decades of experience in overseeing internal 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 shows certainly have some ability to regulate themselves (as the PwC review after the Moonlight snafu proves).
But as with elections, the reason for the CFTC’s VERY broad definition of “gambling” appears to be the idea that the true “public interest” lies in the CFTC keeping itself out of having a say. Sports betting and event betting are still not fully legal in all US states, and oversight of the issue appears to be too much for the CFTC’s meager balance sheet. This is even clear in Benham’s statement, with FTAV’s emphasis being:
As of 2021, the number of event contracts listed for trading on CFTC-registered exchanges has increased significantly. To put this increase in perspective: More event contracts were listed for trading in 2021 than in the previous 15 years combined. And that has been true every year since then. . .
Our mission is to protect the public interest by ensuring that America’s derivatives markets provide a means for managing and assuming price risk and providing price discovery through liquid, fair, open, transparent and financially secure trading facilities. Market integrity is so emphasized in this mandate that the CFTC has civil enforcement authority when it comes to the possibility of fraud, manipulation and other abuses such as the dissemination of false information in the underlying or spot commodity markets. Political control agreements on CFTC-regulated exchanges would take the CFTC well beyond its historical expertise and jurisdiction, potentially enabling it to self-monitor such markets for fraud and election manipulation. . .
Benham primarily discusses the election portion, but his statement appears to address the broad definition the proposal promotes. “Public interest” in this case means that the CFTC does not make mistakes, and not the actual fundamental fairness, practicality, or public good of the market.
The proposal still needs to be ironed out by the CFTC, with the comment period running until July 9. There will certainly be an onslaught of lobbying from groups like Kashi, FanDuel and other platforms. And we suspect there will be many more, given the mixed logic and vague definitions. As Mersinger says:
The fact that certain parts of the proposal are vague, extremely weak or simply pointless suggests that it has either been hastily drafted or is primarily motivated by the sheer hatred that the Commission appears to have towards event contracts.