The Commodity Futures Trading Commission (CFTC) has proposed clarifying its rules for event contracts in a way that would ban derivatives based on political contests, athletic competitions, and awards.
If enacted, the change will leave those seeking to hedge the outcome of US elections and companies eager to offer those political markets in the cold. Likewise, exchanges offering sports and award show contracts would soon disappear.
Initiated on Friday with a 3-2 vote, the Notice of Proposed Rulemaking details an effort to specify the types of event contracts prohibited by section 5C of the Commodity Exchange Act (CEA) and subsequently considered contrary to “public interest.”
The CFTC regulates securities and derivatives in the US. Its policies allow the trading of contracts on a broad range of future events, based on the logic that companies need to be able to hedge against things that would impact their business. Only certain types of events are off-limits, such as assassinations.
The list of exclusions includes the broad category of “gaming” to prevent the abuse of contracts to gamble on something like the flip of a coin. Until now, however, the boundaries of that term have not been well-defined.
Clarity Needed on What Constitutes Gaming
Proponents of the changes say clarifying the definition of “gaming” will remedy the issues the CFTC has faced with political exchanges like PredictIt and Kalshi, while also offering “broader public benefits.”
As defined by the CFTC proposal, gaming, for its purposes, would mean:
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.
The proposal also suggests minor language and technical changes to its event contract rules “to further align with the statutory text” and “enhance clarity and organization.”
Bonus contacted the CFTC press room to clarify aspects of the proposal, like what might constitute a “political contest” beyond an election. As yet, there’s been no reply.
Comments on the proposed changes are open until June 9. Once received, the CFTC will publish all related comments online.
Political Prediction Markets Attract Controversy
Despite growing in popularity recently, event betting remains controversial, even as the CFTC oversees several markets.
For years, investors have used binary options to legally hedge against anything from changes in government policy to natural disasters. More recently, the array of propositions on offer has expanded to include things like the winners of awards shows. These contracts have become increasingly attractive to retail traders.
Notably, those backing political event contracts suggest they allow ordinary citizens to cushion themselves from political impacts in ways usually reserved for the elite. In contrast, opponents caution the contracts could encourage election manipulation.
The two sides came to a head in 2022 when event trading platform Kalshi pushed to offer contracts based on congressional elections. For that effort, Kalshi received pushback from lawmakers and the regulator. In November 2023, the company retaliated with a suit against the CFTC over its order blocking political event contracts on Kalshi’s exchange.
PredictIt, another event exchange, is similarly battling the CFTC over the latter’s attempt to shutter its longstanding political prediction market.
With the move to define gaming, it appears the CFTC is looking to avoid these kinds of fights.
CFTC Notes Surge in Event Contract Popularity
According to the CFTC, the “number and variety” of event contracts listed with CFTC-registered exchanges has substantially increased in recent years. It also noted a jump in applications for and expressions of interest in “listing event contracts for trading.”
Given that increased interest, the CFTC argues that clarifying what’s out-of-bounds will benefit all involved.
The proposal explains that defining “gaming” will help establish a shared understanding and uniform application of the term. This clarity, in turn, will assist entities and applicants in keeping their product design within the rules. As a further benefit, the Commission expects the new definition will mean fewer reviews and free up CFTC resources. Based on previous experience, the CFTC estimates each review requires 625 hours of staff time at a cost of approximately $220,000.
During an open meeting on May 10, CFTC Chairman Rostin Behnam issued a statement supporting the proposed amendments. In it, he said that allowing political contracts would ultimately turn the regulator into an “election cop.”
Said Behnam:
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.
Still, before the new rules take effect, the CFTC must give 60 days for public comment. Then, they’ll make any necessary changes before holding another vote to finalize the changes.
Dissents Claim Commission Overreach
Despite Behnam’s support for the proposed changes, two of the CFTC’s republican commissioners shared concerns over the CFTC’s reach.
In her dissent, Commissioner Summer K. Mersinger clarified that while she supports event contract rulemaking efforts overall, she cannot support the current proposal as is.
At first blush, she said the proposal appears to be “much ado about nothing,” but on closer inspection, it is a “wolf in sheep’s clothing.”
My dissent should not be taken as an indication that I am a fan of all event contracts. But it is hard not to conclude from the multitude of defects in this Proposal that its significant overreach is motivated more by a seemingly visceral antipathy to event contracts than by reasoned analysis.
It does not matter whether we think event contracts are a good idea or a bad idea; the Commission must exercise its authority with respect to event contracts within the scope of the CFTC’s legal authority and must appropriately implement the authority that Congress has provided us. This Proposal fails both tests.
Commissioner Caroline D. Pham joined the dissent, arguing that the proposal infringes on state rights and would reverse event contract markets.
The contracts causing so much consternation for the Commission have not been, and are not gaming. If the Commission could accept that and move on, we could have a healthy discussion over how to effectively regulate these markets as we do any other and protect against abusive trading in retail binary options contracts. Instead, we have muddled it and made a mess. I look forward to the comments.
Pham Calls for Independent Commission Study
Ahead of the open meeting, Commissioner Pham took her dissent further, calling for a third-party Government Accountability Office (GAO) study. She also called on the Commission to adopt review and accountability measures to assess its effectiveness and identify needed improvements.
Despite the road here being paved with good intentions, today’s event contracts rulemaking is yet another example of how far the Commission has strayed from the requirements of the Administrative Procedure Act and the Constitution and how little the Commission seems to care for fairness and due process under the law.
Pham, recently the subject of an ethics complaint by not-for-profit market watchdog Better Markets over her actions related to event contracts, added:
Absent these forward looking and proactive measures, I fear that the Commission will continue to lack the procedures and controls needed to be effective at our mission, making the CFTC susceptible to failure to protect our markets and the public.
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