Gaming over?

The Commodity Futures Trading Commission, a record recipient of Alphaville’s ire, proposed a rule change earlier this month that could ban event contracts from the U.S. derivatives market — potentially ending the yearslong push for options trading on sports games, awards shows and perhaps most crucial: elections.

The CFTC’s amendment would expand the types of contracts that could be considered “gaming” and thus prohibited under the FTC due to their impact on the “public interest.” As summarized by CFTC Chairman Rostin Behnam, with emphasis from FTAV:

The proposal includes a provision that event contracts involving any of the enumerated activities in section 5c(c)(5)(C) of the CEA (gambling, war, terrorism, murder, and activities unlawful under state law), as category, is contrary to the public interest and should therefore not be listed for trading or accepted for clearing through a registered entity. The illustrative examples of gaming that I have just mentioned are therefore against the public interest and cannot be listed for trading.

To be clear, this means that event contracts based on the outcome of a political contest such as an election may not be placed on the trading list or accepted for clearing under the proposed rule. Not only do such contracts fail to meet the economic purpose of the futures markets; they are illegal in several states and could potentially and impermissibly undermine state responsibilities for overseeing federal elections. This is not a new phenomenon for the CFTC. Over the past twenty years, the CFTC – through many administrations – has remained steadfast that election or political contracts should not be allowed 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 contracting platforms, the CFTC and the Senate body that regulates this (by the quirk of history, the Committee on Agriculture, Food and Forestry) are adamant that they will only allow political event betting platforms exist for “academic purposes”. purposes,” such as gauging investor sentiment about upcoming elections. They have taken steps in the past to shut down PredictIt, the largest election betting site, and actively monitor the election portions of other event betting sites, such as the Iowa Electronics Market.

This could be seen as a bit conservative from a global perspective. The stance taken by the CFTC and other US regulators makes the US stand out from other advanced economies, with popular global gambling exchanges such as British bookmakers Betfair and Canada’s FanDuel required to specifically ban Americans from voting on their election exchanges.

The regulator’s position is not that betting on elections is itself illegal; that, like most other betting in America, is a matter for individual states. The difference here is that the CFTC does not want to see the creation of a formal market under US federal jurisdiction (similar to the Treasury Committee’s recent position on regulating unbacked crypto exchanges).

But in this view of this American author (a former PredictIt user who had frequently bet on the number of times per day that Donald Trump would tweet in the White House), the CFTC’s position on the election markets is coherent. From Benham’s statement:

Contracts involving political events ultimately commodify and undermine the integrity of the unique American experience of participating in the democratic electoral process. Allowing these contracts would put the CFTC, a financial markets regulator, in a position far beyond its mandate and expertise from Congress. To put it bluntly, such contracts would place the CFTC in the role of election agent.

Apart from Benham’s apparent implication that only Americans vote (because for Americans, of course, the US is the only democracy in the world), with the weakened state of the republic it would be unwise to put everything election-related into the bad hands lay. from the CFTC (our anger again).

There are certainly arguments to be made for the usefulness of the data for polling and fears about the rise of unregulated markets, but protecting American democracy, for now, from more contact with capitalism and the CFTC is certainly in “general interest”.

But as for the actual proposed rule itself. . . Let’s just say the CFTC is at it again.

The election part has the broad support of the CFTC’s five commissioners (sorry, investors). But there is broad disagreement about the rest of the policy, best summarized in a scathing dissent from CFTC Commissioner Summer K. Mersinger, with emphasis from FTAV:

The over-broadness of the proposal’s definition of “gaming” would be enough for me to disagree. But that is the proposal’s most blatant overreach the prior determination that any event contract that includes a listed activity is automatically contrary to the public interest – regardless of the terms and conditions of that contract.

The proposal would ban these contracts – unprecedentedly – ​​by declaring entire categories of event contracts as contrary to the public interest. But the Commission does not have the legal authority under the CEA to make public interest decisions on a category-by-category basis.

The proposal’s justification for its approach (at page 37) is that “the law does not require this public interest provision to be made on a contract-specific basis.” This is backwards. The CFTC is a statute and has only the powers granted to it by the CEA. There is no provision in section 5c(c)(5)(C) of the CEA that public interest determinations relating to event contracts relating to listed activities must be made by category. Consequently, the Commission cannot claim this authority through the ipse dixit of “Congress didn’t say we couldn’t do that.”

Let’s ignore the legitimate questions she and fellow Commissioner Caroline D. Pham raise about the case law, an issue that has overshadowed other issues with the CFTC. What’s more interesting is how Mersinger calls the proposed “gaming” definition, which is the most important change in this proposal (our emphasis):

The wagering or risking by anyone of anything of value on the outcome of a political contest, including an election or elections, a competition, or a game in which one or more athletes participate, or an event or non-occurrence in connection with such competition or game, regardless of whether it directly affects the outcome.

Yes, baseball is “America’s favorite pastime.” But it is questionable to use the same “public interest” argument used for election markets in sports markets. And can the same issues really be said of all competitions, such as the Oscars?

This also runs counter to the CFTC’s long-standing efforts to properly regulate event markets. While the regulator has long been an opponent of election betting, the CFTC has made progress in regulating exchanges for other forms of event contracts. That progress has even attracted institutional investors, with SIG recently agreeing to become a market maker on the Kalshi events exchange.

The other critical quote here is “whether it directly affects the outcome.” Limiting bets on who will win an election, the Best Actor Oscar or the Super Bowl is one thing. But limiting options on other external binary events, such as the size of the inauguration crowd, whether Timothée Chalamet will wear a tuxedo to the Oscars (a bet I wouldn’t make), or the length of Super Bowl commercials, can hardly be seen as “in the public interest,” and the potential for perverse incentives seems much harder to prove.

The CFTC’s regulatory basis for this proposal is already difficult for many to accept in election betting. But it’s especially hard to swallow for the other categories of ‘gaming’. The sports industry has decades of experience in policing inside betting (think disgraced American baseball player Pete Rose). And while it’s not as big as the MLB or the NBA, the Academy and other awards shows certainly have some capacity to self-regulate (as evidenced by the PwC review after the Moonlight snafu).

But as with elections, the reason for the CFTC’s VERY broad definition of “gaming” seems to stem from the idea that the real “public interest” lies in the CFTC restraining itself from having to have a say. Betting on sports and events is still not fully legal in all US states, and the scrutiny on this issue appears to be beyond the CFTC’s meager track record. This is even revealed in Benham’s statement, with emphasis from FTAV:

As of 2021, there has been a significant increase in the number of event contracts listed for trading by CFTC-registered exchanges. To put that increase in perspective: More event contracts were listed for trading in 2021 than in the previous 15 years combined. And it has remained that way every year since. . .

Our job is to uphold the public interest by ensuring that the U.S. derivatives markets provide a means to manage and accept price risk and provide price discovery through liquid, fair, open, transparent and financially secure trading facilities. Market integrity is so prominent within that mandate that the CFTC has civil enforcement powers when it comes to the potential for fraud, manipulation and other abuses, such as the spread of false information in the underlying money or commodity 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 the elections themselves. . .

Benham mainly discusses the election part, but his statement seems to address the broad definition that the proposal promotes. “Public interest” in this case is the CFTC not screwing up, not the actual fundamental fairness, usefulness, or public interest of the market.

The proposal still has time to be ironed out by the CFTC, with a comment period in effect until July 9. There will certainly be a wave of lobbying from groups like Kashi, FanDuel and other platforms. And we expect there will be many more, due to the mixed logic and vague definitions used. As Mersinger says:

The fact that parts of the proposal are inaccurate, extremely weak or simply make no sense suggests that it was either hastily prepared or mainly motivated by the sheer hatred that the Commission seems to have towards event contracts.

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