US Election and Sports Betting With Derivatives Face Ban by CFTC

(Bloomberg) -- A top financial regulator took a major step toward directly banning derivatives from being used to bet on political contests and sports games — throwing up another hurdle for those hoping to wager on November’s US election.

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The proposal Friday by the Commodity Futures Trading Commission would crack down on so-called event contracts. Those binary options have been used to bet legally on real-world outcomes such as monetary policy, lunar landings and music awards and are of increasing interest to Wall Street.

Although the asset class has grown in popularity and some exchanges offering trading are overseen by the CFTC, betting on events remains controversial. The push by trading platform Kalshi Inc. to list contracts tied to congressional elections in 2022 created a firestorm, as did a bid from another exchange to allow betting on NFL games.

Read More: Kalshi’s Bid to Offer Bets on US Elections Turned Down by CFTC

The CFTC gives exchanges significant leeway to decide what derivatives to list. Officials can stop contracts relating to “terrorism, assassination, war” and “gaming,” which the CFTC has never defined, as well as those deemed to be “contrary to the public interest.”

Friday’s proposal aims to remove some of that ambiguity by for the first time defining “gaming” under CFTC rules. The definition would include contracts on election outcomes, as well as those tied to sports, awards contests, or even whether a contest or game occurs.

Surge in Contracts

More event contracts were listed in 2021 than in the prior 15 years combined, according to the CFTC.

In a sign of continued momentum, Kalshi, the first CFTC-regulated event contracts exchange, recently signed an agreement with Wall Street market-making firm Susquehanna International Group, to open a trading desk for its contracts.

During a meeting to outline the plan at the agency’s Washington headquarters, the CFTC’s two Republican commissioners expressed concerns that the CFTC was going too far in prohibiting broad categories of contracts under its definition of “gaming.”

Proponents of using the contracts on political outcomes say that they let ordinary citizens hedge the impact of politics on their lives or business in ways otherwise only available to sophisticated trading firms. Opponents, however, caution that they could create incentives for manipulation.

‘Election Cop’

“Allowing these contracts would push the CFTC, a financial market regulator, into a position far beyond its Congressional mandate and expertise,” CFTC Chairman Rostin Behnam said during the meeting. “To be blunt, such contracts would put the CFTC in the role of an election cop,” he added.

Kalshi and PredictIt, a market that American political junkies have long used to bet on elections, have both sued the CFTC over its positions on events contracts.

Beyond election outcomes or sports winners, the CFTC new rule would also prohibit derivatives being used to bet on things like injuries to players.

Even with Friday’s move, it’s not clear that the new rules will be in place before the start of the next NFL season or the US elections. For the rule to take effect, the CFTC will take public comment for at least 60 days, make changes, and then need to hold another vote to finalize the rule.

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