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CFTC Commissioner Explains Rejection of Futures on NFL Games

Steven.Lofchie@cwt.com's picture
Commentary by Steven Lofchie

CFTC Commissioner Dan M. Berkovitz argued that futures contracts tied to the outcome of sporting events should be permitted to be traded on a designated contract market ("DCM") if it can be demonstrated that there is an economic purpose and the contract provides impartial access to the public.

Mr. Berkovitz's statements came following the recent withdrawal by Eris Exchange ("ErisX") of a proposal to list futures contracts tied to the outcome of NFL games. Mr. Berkovitz said that the proposal was "deficient" because (i) there was insufficient evidence of hedging utility and (ii) it limited trading to eligible contract participants ("ECPs"), thereby excluding the general public from trading the contract on the DCM.

On the hedging utility of the contracts, Mr. Berkovitz said that the CFTC "should recognize the significant growth of sports betting as a legalized activity in recent years with significant underlying commercial activity." Mr. Berkovitz noted that CEA Section 5c(C)(5)(C) ("Common provisions applicable to registered entities") was enacted when most sports betting was illegal in the United States; however, since the Supreme Court's decision invalidating the Professional and Amateur Sports Protection Act in 2018, sports betting has expanded rapidly. Mr. Berkovitz said that, while ErisX did not provide sufficient evidence that the NFL contracts would provide "hedging and/or price basing on more than an occasional basis," should an applicant in the future so demonstrate this economic purpose, it would not be "contrary to the public interest" for the CFTC to certify, given that sports betting is now legal in many states under both state and federal law.

On the proposed exclusion for retail customers from trading the contracts, Mr. Berkovitz argued that such an exclusion would violate the DCM Core Principles 2 (impartial access) and 19 (antitrust considerations) under CFTC Rule 40.2 ("Listing Products for Trading by Certification"). As to impartial access, Mr. Berkovitz stated that, by excluding individuals who are not ECPs, the contracts were "blatantly discriminatory" by barring retail customers with less than $10 million in discretionary investments from access to the DCM.

On additional antitrust considerations, Mr. Berkovitz said that ErisX's proposal would have created a market structure where sports bookmakers could trade among themselves while preserving an exclusive ability to provide sports event contracts to the public. As the proposal would have (i) protected bookmakers from competition from retail traders and non-market-making ECPs and (ii) required retail customers to obtain sports-betting contracts from bookmakers, Mr. Berkovitz concluded that this is a "no-lose situation for the bookmakers, and a no-win situation for the public."

Commentary

Commissioner Berkovitz makes the case for supporting futures contracts on sporting events, while distinguishing the ErisX proposal to list futures on NFL games. It is difficult to see why limiting the availability of the NFL futures contracts to sophisticated investors would be an antitrust violation. Many financial contracts are available only to limited types of investors. Certainly, the securities exchanges commonly recommend to broker-dealers that certain listed contracts with a derivative component be made available only to limited investors. Further, it is hard to reconcile the Commissioner's complaint that the contracts on NFL games must have hedging utility with the complaint that retail investors could not enter into the contracts. That is, while one might argue that a retail investor would want to go long on Bill Belichick's Patriots to win the Super Bowl again this year, it is hard to see what the retail investor would be hedging, or why the possibility that someone else would be hedging is significant to the retail investor.

That said, Commissioner Berkovitz's support, even if lukewarm, for the possibility of allowing futures contracts on NFL games makes one think that it will happen. There is money to be made. Go, Patriots Nation!

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