The U.S. Commodity Futures Trading Commission (CFTC) prepares new rules to define which contracts can be traded in prediction markets and expand protection for individual investors. The roadmap was detailed by the agency's chairman, Michael Selig, on Thursday (20), during the first meeting of the Innovation Advisory Committee.
The changes involve three fronts: criteria for contracts related to sensitive topics, new data reporting requirements, and a future review of the rules applied to platforms that offer these products.
Prediction markets allow trading contracts whose outcome depends on a future event. In practice, participants buy and sell positions on the likelihood of a given event occurring, and prices vary according to market expectations.
CFTC wants to define which contracts can be traded
One of the main changes is in Rule 40.11, used by the CFTC to analyze contracts related to activities such as war, terrorism, assassination, gambling, and illegal conduct.
U.S. law allows the commission to prohibit certain contracts when it considers that they go against the public interest. The problem, in Selig's assessment, is that important concepts used in this analysis still do not have sufficiently defined criteria.
In June, the CFTC presented a proposal to establish definitions and create a more predictable framework for these decisions. The text also provides for an analysis of up to 90 days for contracts subject to the rule and specific criteria for assessing the public interest.
The measure gained importance with the expansion of prediction markets. In March, when opening a regulatory consultation on the sector, the commission itself reported that the number of requests for registration as a designated contract market had more than doubled in a year, driven mainly by companies interested in these products.
Selig said the intention is to replace the current uncertainty with criteria that allow platforms to know in advance which types of contracts may face restrictions.
Consumer protection enters the next package
The CFTC also plans to amend parts of its regulations applicable to registered markets that list event contracts.
Selig said the commission should propose changes to Parts 38 and 40 of the agency's rules. The package should include new requirements for consumer protection, product governance, market design, and incentive programs.
Attention to incentives has already begun. On August 12, the CFTC's Market Oversight Division published guidance for registered platforms after identifying problems in documents related to market maker, liquidity, and incentive programs, especially in event-based products.
Another front concerns data sent to the regulator. In June, the commission proposed a specific reporting framework for certain contracts fully collateralized by funds deposited by participants.
The proposal seeks to give the CFTC the necessary information to monitor these operations without maintaining obligations originally created for other types of derivatives.
Dispute with states continues
The roadmap also touches on a dispute over who should oversee these markets in the United States.
Selig maintained that federal law grants the CFTC exclusive jurisdiction over designated contract markets, known by the acronym DCM. He said the agency will continue defending that interpretation in the courts against state initiatives that try to apply local gambling and betting laws to contracts traded on these platforms.
The CFTC chairman also rejected the idea that contracts based on future events are an entirely new category. U.S. commodities law already considers events, contingencies, and occurrences as possible underlying assets for derivatives.
The roadmap presented by Selig does not, by itself, create an immediate new regulatory regime. Part of the changes are already in the consultation process, while others have yet to be formally proposed by the commission.
