Prediction Markets in the US & the CFTC — Making it all work (Part 4 of 5)
June 24th, 2008If you're new here, you may want to get Mercury's Blog by Email or subscribe to my RSS feed. Thanks for visiting!
This is part 4 in a five-part series where I present first drafts of what I intend to send to the CFTC in response to their request for input on prediction markets or “event markets.” More background can be found in my first post here.
This post deals with questions of Legal Implementation.
Legal Implementation
16. Is it appropriate for the Commission to direct certain or all event contracts onto markets that are regulated differently from and perhaps less stringently than DCMs? For example, it may be warranted or necessary to treat event markets that aggregate information solely for academic or research purposes, event markets set-up for internal corporate purposes, or event markets that offer exceedingly low notional value contracts to traders differently than markets that possess the attributes of traditional DCMs.
Event markets established for academic, research, internal corporate purposes, or low-notional-value should be treated under the “safe harbour” provisions that have been put forward by a number of esteemed academics. Experimentation is essential to allow these unique tools to grow, and a safe harbour for these purposes ensures that the public will not suffer any harm.
However, to only allow event contracts to be traded on such markets is a very poor idea. Event markets should be allowed to be traded as other commodity futures, on regulated exchanges. The amount of regulation should be sufficient to protect the retail traders on these exchanges, but should not be so excessive to never allow event markets to flourish. Striking this balance is likely subject to much further discussion and general comment.
17. Is it appropriate for the Commission to use the Section 4(c) exemptive authority of the Act for implementing a regulatory scheme for event contracts and markets? In this regard, the Commission notes that it has the discretion to grant an exemption under Section 4(c) to certain classes of transactions without having to make a determination as to whether such transactions are subject to the Act in the first instance.
It is absolutely appropriate for the Commission to use the Section 4(c) authority to exempt event contracts and event markets from regulation. While retail customers should be protected in a marketplace, it would be more appropriate to ensure that little (or no) regulation of event markets exists, even in retail event markets. The only way these marketplaces will survive is to treat retail customers appropriately. After a certain period of time, this issue can be reviewed to determine if any regulation may be needed, and if so what the purpose of that regulation would be.
18. Is the issuance of staff no-action relief, such as the relief issued to the IEM, an appropriate or preferable means for establishing regulatory certainty for event contracts and markets? Is a policy statement appropriate or preferable?
The no-action relief, similar to the relief issued to the IEM, would be a suitable regulatory scheme for most markets. If this letter could also be issued to larger commercial exchanges, the situation would be even better.
A policy statement would also be appropriate, but I believe a no-action relief letter would be the best solution for any event marketplace that has retail traders. For academic and internal corporate markets, the policy statement would be sufficient and preferable.