Key Takeaways
- Prediction markets have exploded in popularity in recent months, and the CFTC has taken notice.
- In recent months, the CFTC has issued an advance notice of proposed rulemaking seeking comment on event contracts traded on DCMs, withdrawn previously proposed amendments to a rule prohibiting certain event contracts and filed an amicus brief asserting exclusive federal jurisdiction over event contracts traded on DCMs.
- CFTC staff have published a request for comment on direct clearing for retail participants (an issue central to the plumbing of event contract DCMs and DCOs). The CFTC’s Division of Market Oversight and Division of Enforcement have each issued a staff advisory in connection with event contracts traded on DCMs.
- The CFTC’s Division of Enforcement has also brought two enforcement actions for insider trading in connection with event contracts traded on a DCM.
- Advisory firms registered with the CFTC or SEC should watch these developments carefully.
- Scrutinized contracts are not limited to sports betting and political events but can also include contracts on events closely tied to securities and the companies that issue them.
- The CFTC actions point to expanded federal oversight and regulation of prediction markets.
- Registered advisory firms may wish to assess their risk exposure, including to the personal trading activity of associated persons.
- Registered funds and BDCs seeking to participate in event contract markets should consider the custodial requirements of the 1940 Act, which may limit their ability to trade directly on DCMs and clear through DCOs that are not eligible custodians, although the recent removal of non-intermediation conditions by several DCMs has expanded access through intermediated models.
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Contributors
The authors would like to thank Steve Engel and David Bartels for their contributions to this OnPoint.
