Prediction Markets Advanced Notice of Proposed Rulemaking

Summary

SIFMA ¹ and SIFMA AMG ² provided comments in response to the Commodity Futures Trading Commission's (CFTC) advanced notice of proposed rulemaking and request for comments on prediction markets (ANPR).

Excerpt

SIFMA represents broker-dealers, swap dealers, security-based swap dealers, and asset managers that are subject to comprehensive federal regulatory regimes and that participate in U.S. and global markets. SIFMA's response to the ANPR addresses prediction markets within the context of the existing derivatives market structure framework. As such, our observations focus on how any future regulatory approach might interact with established statutory mandates and regulatory expectations applicable to our members.

SIFMA appreciates the Commission's interest in better understanding the evolving landscape of prediction markets and recognizes the importance of ensuring that financial products develop within a clear and coherent regulatory framework. Given the breadth and preliminary nature of the issues raised in the ANPR, SIFMA's comments are intended to underscore certain overarching considerations that may be relevant to the Commission as it evaluates potential next steps. SIFMA does not seek to address each of the individual questions posed, nor to advocate for specific outcomes, but rather to highlight several factors that are particularly salient for our member firms, which include: (1) product categorization and jurisdictional boundaries; (2) interagency coordination; (3) market integrity and investor protection; and (4) cross-border considerations.

I. Background

Prediction markets are trading platforms that offer event-based derivatives-commonly referred to as event contracts-that settle based on the outcome of a specified future event. These contracts are typically structured with binary payoff structures and are intended to be cash-settled by reference to an objective, verifiable criterion.

Under the Commodity Exchange Act ("CEA"), certain event contracts may fall within the definition of a "swap," as set forth in CEA Section 1a(47), as amended by Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Title VII"). Platforms that list such contracts for trading by U.S. persons generally operate as CFTC-registered designated contract markets ("DCMs") and, as such, are subject to the DCM Core Principles in CEA section 5(d) and applicable Commission regulations governing market integrity, surveillance, and customer protection.

Over the past year, prediction markets have expanded materially in scope, volume, and public visibility, with a significant increase in both the number of event contracts offered and the range of underlying events. This growth has coincided with heightened regulatory attention.

One consideration is that some contracts may have characteristics akin to securities regulated by the Securities and Exchange Commission ("SEC"). CFTC Chairman Selig noted at a recent joint CFTC-SEC event that although prediction markets have been within the CFTC's regulatory jurisdiction for decades, there is some lack of clarity, leading him to direct staff to work with SEC staff on joint interpretations regarding product definitions. ³ In a subsequent speech, SEC Chairman Atkins acknowledged that some event contracts may be subject to SEC jurisdiction, noting that "…it is past time that the [Commission] work with the CFTC to provide clarity on a range of Title VII definitional issues, including whether certain event contracts may be security-based swaps or other types of securities, such as options on securities." ⁴