CFTC Publishes Prediction Markets Advisory For Exchanges

• CFTC issues advisory on listing prediction market event contracts.
• Guidance targets exchanges offering event-based derivatives.
• Move signals closer regulatory oversight of prediction markets.

The US Commodity Futures Trading Commission has unveiled new guidance for the growing market for prediction-based derivatives. On Thursday, the agency’s Division of Market Oversight issued an advisory detailing the regulatory requirements for exchanges listing event-based contracts, which are financial instruments that allow traders to speculate on the outcome of real-life events

Guardrails for Event Contract Trading

The agency’s proactive move follows the “rise in popularity” of prediction markets across many digital asset and traditional derivatives platforms. Hence, the CFTC seeks to encourage the growth and innovation of the sector while clarifying how such contracts should be supervised and reviewed under current commodities laws

As part of the regulatory requirements, the CFTC reminds exchanges offering event contract markets that it reserves the sole authority to determine that an event contract is not suitable for the public if it has links with terrorism, murder, war, and other such vices. The Commission will not list such contracts or make them available for trading via a registered entity

ADVERTISEMENTDesignated Contract Markets (DCMs) are therefore obligated to monitor all the trading activities on their platforms in real-time to determine any system dysfunctions or inconsistent trading activities. Upon identifying any such issues, DCMs are mandated to follow agency regulations, which may involve extracting trader data and applying disciplinary measures or other recommended procedures.

The CFTC’s advisory reiterates the regulator’s long-standing stance against unlawful practices such as any use of devices, schemes, or technologies to attempt to scam others or manipulate prices of exchange-listed contracts

A critical aspect of fraud in the digital asset market is insider trading, which involves using confidential information to gain an unfair advantage and profit in the market. The commodities regulator warns that it “retains authority to investigate and bring civil enforcement actions related to any such activity.”

ADVERTISEMENT## Documentation and Compliance Standards for Exchanges

Before offering a new product for training, an exchange must provide the agency with written certification that the contract complies with the Commodity Exchange Act and other regulatory requirements. As an alternative, they can seek the Commission’s prior approval on the contract

In either case, the DCMs must include some of the contract’s information, including terms and conditions and a comprehensive explanation and analysis of the contract’s compliance with the provisions of the Commodity Exchange Act, including its 23 core principles and the Commission’s regulations

Additionally, the agency spelled out specific listing requirements for certain event contracts, such as those related to sports, which may “implicate the involvement” of professional sport leagues and governing bodies. DCMs are therefore enjoined to consult adequately with these bodies, apply standards, and establish information sharing where necessary.

The CFTC’s staff advisory follows the agency’s resolve to facilitate the consolidation of prediction markets by providing clarity and blocking legal assaults against the growing sector

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