The Commodity Futures Trading Commission issued new guidance for sports predictions and other markets with Chairman Michael Selig making the reliance on self-regulation clear.
On Thursday, the CFTC published an advisory from its Division of Market Oversight concerning prediction markets while noting there will be a public comment period on proposed predictions rulemaking as well. The 45-day period will open once the 32-page notice is published in the Federal Register.
Selig also appeared on CNBC’s “Squawk Box” Thursday morning where he spoke vaguely about what is expected but repeatedly drove home that the exchanges themselves are responsible for making sure they are not offering certain markets.
New sports predictions guidelines
The guidelines mention designated contract markets Core Principle 3. That is what says the DCMs, or the exchanges, cannot offer markets that could be easily manipulated.
Selig mentioned injury markets as an example where the outcome could be manipulated by one player harming another.
Since nothing in the guidelines is definitive, a market that is easily manipulated could include individual player props.
The guidelines notes that sports-related event contracts “have often been shown to be consistent with [designated contract markets] Core Principle 3 where the settlement outcome depends on the aggregate performance of multiple participants over an extended period of play.”
Exchanges should talk to leagues about sports predictions
While the CFTC is discussing “issues of settlement integrity” with some sports leagues, the advisory suggests the exchanges reach out and get approval on markets from the leagues as well.
Operators also should consider relying on official data to settle said contracts.
“DMO staff therefore recommends that DCMs consider (1) engaging in pre-self-certification communications with such relevant sports governing bodies or authorities when developing terms and conditions, compliance and market oversight programs for sports-related events contracts, (2) including, as part of the self-certified product submission, an explanation of whether the contract is consistent with the relevant league’s or governing body’s integrity standards, as applicable.
“… In the view of DMO staff, engagement with the sports leagues and other sports governing bodies may further a DCM’s ability to comply with their obligations under DCM Core Principle 3 with respect to sports-related event contracts by enhancing access to information about the nature and dynamics of underlying events.”
Selig outsquawked on CNBC
“Squawk Box” hosts Joe Kernen and Becky Quick were trying to get specifics out of Selig, who readily fell back on the exchanges being the first line of defense and that he would not pre-judge any markets.
Kernen asked about someone in the studio trading on a market about what he or Quick would be wearing on the show that day. Selig mentioned again that it is up to the exchanges if that kind of market would be over the line, but Kernen insisted, saying “but I’m asking you.”
“Our markets are information machines, right?” Selig began. “And we’re looking for efficient information about some of these questions. And there’s a distinction between insider trading or something that’s manipulable from just trading on certain information.
“So, sure, if someone sees what color tie you’re wearing and there’s a contract on that, that’s not necessarily inside information, that’s not necessarily something where you have a duty of confidentiality.”
Are exchanges put on notice?
Quick asked if this was the CFTC’s way of making it clear it will crack down on certain things if exchanges do not do it first.
“What I’m hearing here is basically what we heard from the SEC administration under President Biden, which is basically ‘Hey, we’re going to put the risk back on you, it’s up to you all to decide but we are putting you on notice that some of this stuff sounds ridiculous,” Quick said. “It’s what they did with Bitcoin in some ways and it kind of froze a lot of the activity in the industry.
“It sounds to me like you’re trying to evoke that same situation where it’s up to the Kalshis or the other prediction markets to start self-regulating or else, and you can make an example of it if you think there are stupid things they are doing.”
“I think it’s more of a free-market approach than the Biden administration but we’re certainly going to have our exchanges as the first line of defense as our statute requires,” Selig responded. “The exchanges have to evaluate the products that are listed and comply with our guidance.”
