FIA filed a comment letter responding to the US Commodity Futures Trading Commission's Advance Notice of Proposed Rulemaking on Prediction Markets. Event contracts and prediction markets have garnered substantial public interest in recent years, highlighting the potential economic benefits many see in the products and platforms. FIA’s letter notes that the U.S. Commodity Exchange Act and CFTC regulations provide a strong foundation for the responsible development and effective regulation of event contracts and prediction markets and FIA’s commitment to work collaboratively with the CFTC in its efforts to advance responsible innovation in these new markets.
FIA offers a series of recommendations for the CFTC’s consideration in formulating clear, workable rules and enhancing existing regulatory practices, all rooted in the CEA core objectives of promoting responsible innovation and preserving sound risk management. These include:
- retaining the established tripartite DCM, FCM, and DCO market structure for leveraged derivatives contracts, including event contracts;
- limiting the trading and clearing of leveraged event contracts to those contracts for which the DCM and DCO in the product submission can fully demonstrate compliance with applicable DCM and DCO core principles taking into account the unique risk considerations of event contracts;
- considering whether a separate, fully siloed default fund may be appropriate for leveraged event contracts;
- revisiting the process by which DCMs and DCOs list and clear leveraged event contracts to ensure the Commission has a meaningful opportunity to review such contracts; and
- addressing insider trading and other market conduct, conflicts of interest, and settlement finality concerns that may present with event contracts.
“The Commission has an opportunity to establish a principled regulatory framework for the listing of leveraged event contracts by DCMs and the clearing of such contracts by DCOs. FIA’s targeted recommendations preserve the integrity of the broader clearing ecosystem the CEA was designed to protect, while ensuring the Commission is equipped to support responsible innovation in prediction markets,” writes FIA’s Chief Legal Officer and General Counsel, Allison Lurton.
