The current debate in the US around prediction markets feels familiar to me.
Back in 2008, when I served as Acting Chair of the Commodity Futures Trading Commission, the agency issued its first request for public comment on the regulatory treatment of what we then called “event markets.” At the time, these products occupied a small corner of the marketplace, but they already raised important questions about innovation, market oversight and the public interest.
Nearly two decades later, those same questions have returned as prediction markets have moved into the mainstream. Technology has accelerated their growth. Retail participation has expanded rapidly. And online platforms now offer contracts tied to elections, economic indicators, sporting events and other real-world outcomes.
As policymakers revisit this issue, they should recognize both sides of the debate. Prediction markets represent a meaningful financial innovation that can improve information discovery and create new forms of risk transfer. At the same time, these markets raise legitimate questions about market integrity, regulatory boundaries and customer protections.
FIA recently submitted comments to the CFTC urging the agency to establish a clearer and more durable regulatory framework for prediction markets.
Today, market participants, exchanges and end users face significant uncertainty regarding which contracts regulators may permit, how the agency should apply the public-interest test and what standards should govern the review process. Given the agency’s mandate to support responsible innovation, it must move quickly to avoid uneven expectations across markets and the likelihood that activity will migrate outside regulated venues.
Afterall, one of the great strengths of US derivatives markets lies in their regulatory foundation. For decades, the futures industry has relied on a proven market structure that clearly separates the roles of exchanges, intermediaries and clearinghouses. Designated contract markets, futures commission merchants and derivatives clearing organizations each perform distinct functions that support customer protection, risk management and market integrity.
While most predication market contracts do not involve leverage, FIA believes regulators should extend the full clearing framework for leveraged derivatives to any leveraged event contracts. When leverage is injected into these products, FCMs and their risk management and customer protection responsibilities become the shock absorbers of the system and must be part of the market structure.
The existing DCM/DCO/FCM framework has helped US derivatives markets become the deepest, safest and most resilient in the world. Policymakers should build on that strength.
At the same time, FIA recognizes that leveraged event contracts present unique risks that regulators and market operators must address directly. Exchanges and clearinghouses should demonstrate clearly how these products comply with existing core principles, including standards related to market integrity, financial safeguards, risk management and participant protections.
And the CFTC should have a meaningful opportunity to evaluate whether specific event contracts meet the requirements of the Commodity Exchange Act and whether the associated clearing arrangements appropriately manage the risks these products create.
Clearing also deserves special attention.
Because event contracts may exhibit concentrated outcomes, sudden volatility spikes or heightened correlation risks, FIA suggested that regulators consider whether separate and fully siloed default funds may make sense for certain leveraged event products. Segregating those risks could help protect the broader clearing ecosystem while preserving confidence in central clearing.
FIA’s recommendations also address market conduct concerns that become particularly important in event-driven products. Prediction markets may create opportunities for insider trading, manipulation, conflicts of interest or disputes regarding settlement finality. Regulators and market operators must address those issues proactively to maintain confidence in these markets.
None of these concerns argue against innovation. In fact, they argue for responsible innovation within regulated markets.
The US has built the deepest, most competitive and most trusted derivatives markets in the world because regulators established clear rules, strong risk controls and transparent oversight. Those principles should continue to guide the evolution of prediction markets.
Innovation will continue. Technology will continue to evolve. Retail participation will continue to grow. Regulators cannot stop those trends, nor should they try.
Rather, regulators can ensure innovation develops within markets that remain transparent, resilient and accountable.
History shows that markets function best when participants understand the rules of the road. The same principle applies here.
Prediction markets will continue to evolve in ways we cannot fully anticipate today. But one principle should remain constant: innovation works best inside open, transparent and well-regulated markets.
That principle has guided derivatives markets for decades. It should guide the next generation of financial innovation as well.
