Paradigm Files Comment Letter on the CFTC’s Prediction Markets NPRM
Today, Paradigm filed a comment letter with the Commodity Futures Trading Commission on its Notice of Proposed Rulemaking regarding prediction markets, which represents the agency’s most significant proposal for prediction market regulatory clarity. Simply put, this is the broad regulatory proposal many of us have been waiting for and calling for.
Happily, the NPRM gets the big calls right. It adopts a plain-meaning definition of “gaming” that encompasses sports-related contracts. It builds a genuine multi-factor public interest inquiry instead of categorical bans. And it puts the burden on the Commission to affirmatively show a contract is contrary to the public interest rather than on exchanges to prove a negative. Our letter encourages the Commission to keep charging forward in those directions, but we also flag a few places where the Commission needs to tread carefully.
Our letter focuses on three areas:
First, on the definition of “gaming,” we support the Commission’s ordinary-meaning approach. Words matter and, when possible, the best move for regulators is to simply rely on the plain meaning of words instead of engaging in bespoke contortions to reach a desired result. To that end, the Commission is smart to reject the alternative, more philosophical test floated in the NPRM, which would be a recipe for inconsistent results and regulatory fog for market participants and users. We do ask the Commission to sharpen the line between “gaming” events and nongaming “contests,” since the current examples (a Cy Young Award is a contest; most strikeouts in a season is gaming) arguably drive in different directions.
Second, on the public interest inquiry, we support the Commission’s multifactor approach and its recognition that gaming contracts are not presumptively contrary to the public interest. As we note in the comment, this is a position squarely entrenched within the powers granted to the Commission by Congress: it is the CFTC’s call on when something is or is not in the public interest under the Commodity Exchange Act. But there are a few deft moves the CFTC can make here. The Commission should more firmly enunciate that it lacks authority under the CEA to force a prediction market to halt trading while a review is pending. Additionally, the CFTC should explicitly state that sports leagues’ input on whether contracts are in the public interest is important but not binding. The CEA does not give any stakeholders, be it sports leagues, investors, tribes, former regulators, or individual senior members of Congress, a veto on the CFTC’s public interest determinations. That power remains exclusively in the hands of the CFTC.
Third, on exemptive authority, we urge the Commission to exempt well-understood categories of event contracts, like season-long aggregate-outcome contracts, from requiring individual re-review. There is no need to make well-worn contract types all run the individualized review gauntlet every time like some parody of professional sports training camps. We instead suggest a simple, evidence-based way to grow that list: once a contract design clears review without being prohibited, it should be treated as cleared going forward rather than re-litigated contract by contract.
Prediction markets work because they are markets: they aggregate information, they let people hedge real risk, and their prices tend to beat expert forecasts. A rule that gives exchanges a predictable, workable standard for which event contracts can list is good for the industry and good for the public that relies on the information these markets produce. We appreciate the Commission’s continued engagement on these issues and look forward to a final rule that builds on the NPRM’s foundation.
You can read Paradigm’s full comment letter [here].